
< r\^ o " o . ^^ 














fyycf "*o''^^'*^^ ^. '■:?-.• .r 




4 o 







OUTLINES 



ELEMENTARY ECONOMICS 



/^)f 



HERBERT J.'^^pAVENPORT 

Author of " Outlines of Economic Theory 






^^x. 



■• 



Weto fork 
THE MACMILLAN COMPANY 

LONDON: MACMILLAN & CO., Ltd. 
1897 

^: 

All rights 'reserved 



t 



i 



fj 



9 



Copyright, 1897, 
By the MACMILLAN COMPANY. 



Worittooti 5P«S0 

J. S. Gushing & Co. —Berwick & Smith 
Norwood Mass. U.S.A. 



NOTE TO THE TEACHER 



The importance which the author attaches to 
the method of suggestive questions is perhaps 
sufficiently indicated by the space wliicli he 
has assigned thereto. The purpose is several- 
fold : — 

(1) To summon to the aid of the student 
his fund of observation, experience, and crude 
generalization. This is the essential feature of 
the inductive method as applied to the study 
of social phenomena ; 

(2) To effect, through economics, a new cor- 
relation of the student's mental acquirements ; 

(3) To stimulate the interest of the student 
through the association of the discussions with 
the familiar , facts of his every-day experience; 
and 

(4) To concentrate his attention upon the 
difficulties which will furnish the basis for the 
discussion which is to follow. 



vi NOTE TO THE TEACHEB 

It is very possible — indeed it is intended — 
that out of many of these questions the student 
will merely become puzzled. It is believed that 
this is pedagogically helpful ; answers have no 
place except as following questions. It must 
happen also that one question be found of profit 
to this or that student, while entirely failing to 
appeal to a third. 

The author has made an earnest effort to 
avoid definitions and sub-classifications, and in 
general, everything which pertains to what may 
be called the catalogue method of presentation. 
Outside of the work which the questions require 
of the student, the treatment is studiously theo- 
retical rather than descriptive. 

Rightly taught and rightly learned, political 
economy is of the utmost value as a culture 
study, as well as a preparation for the duties 
and activities of practical life. In neither of 
these aspects can any training be adequate, or 
the results of it steadfast in the mental equip- 
ment, if the treatment is merely descriptive and 
discursive, instead of offering a close-knit and 
coherent body of elementary theory. Students 
who are able to master the abstract conceptions 
of algebra and geometry, need experience no 
difficulty with the simpler aspects of economic 



NOTE TO THE TEACHER vii 

theory, if these are presented with such sim- 
plicity of statement and arrangement as the 
subject permits. 

While, however, as is already indicated, it 
has not been the purpose of the writer to make 
an easy text-book, the method' is such that the 
measure of difficulty or of exhaustiveness in the 
treatment will largely rest in the decision of 
the teacher, in view of the age of the pupils 
and the time at their disposal. 

The teacher is advised to require, in general, 
that written answers to both the introductory 
and the review questions be brought to the class- 
room. It is important also that the answers to 
the introductory questions be attempted, or a 
discussion of them had in the class-room, before 
the text is read by the student or appointed 
him for study. 

In conclusion, the teacher is especially cau- 
tioned against the notion that he is expected to 
furnish for himself or his class a satisfactory 
answer to every one of the questions, or even 
in all cases to divine the drift of them. Not a 
few of the questions the author would himself 
be unable to answer. In many cases the pur- 
pose has been merely that the difficulty should 
be honestly met, or again that it be brought 



viii NOTE TO THE TEACHER 

out clearly that the problem suggested is not 
one requiring the attention of the economist as 
such. 

HERBERT J. DAVENPORT. 

Chicago, August 10, 1897. 



ANALYTICAL TABLE OF CONTENTS 

(Eefekences are to Sections) 



CHAPTER I 

PAGE 

The Scope of the Science 1 

The important thing not money, 1 ; but goods, 2. 
Value and price defined, 3. 
Political economy defined, 4. 

CHAPTER II 
Man and Environment 8 

The law of adaptation, 5. 

Man is one term in the adjustment, 6-8. 

The two terms considered together, 9-11, 

Environment affects man, 10. 

Man in energy and effort, 12 ; in moral qualities, 12 ; 
in forethought and intelligence, 12 ; liberty and 
security, 12. 

CHAPTER III 
Utility and Wealth 23 

Utility explains desire ; desire the primary force, 13. 

Utility not an ethical question, 14. 

Production is not creation, 15. 

There is no material measure of wealth, 16. 

The lines of increase are (1) external, (2) inter- 
nal, 17. 

Services, 18. 

Intellectual acquirements are not wealth, 19. 
ix 



ANALYTICAL TABLE OF CONTENTS 



CHAPTER IV 

PAGE 

The Factors in Production 33 

Are man, natural opportunity, and capital, 20. 
Capital an intermediate term, 21. 
Advantages of machinery, 22. 

Wages, Profits, Rents, and Interest 38 

These factors have their respective remunerations, 23. 

Profit is essentially wages, 24-26. 

The inter-relations of profits and wages, 27. 

CHAPTER V 

Value 47 

All remunerations flow from value, 28. 
All outlays made in view of value, 29, 30. 
Desires are satiable, 31, 32. 

Value is fixed by the process of marginal adjust- 
ment, 33-36. 
Is an expression of sacrifice, 37. 
Is in antagonism with utility, 38. 
Production is a purchase from nature, 39. 

CHAPTER VI 

Cost of Production 67 

Human actions follow line of least sacrifice, 40. 
Economic action not necessarily selfish, 40. 
What sacrifice measures value, 41. 
Outlays not the ultimate cost, 42 ; nor labor, 42. 
Cost of production analyzed ; the marginal doctrine, 
43, 44. 

CHAPTER VII 

Rent of Land 78 

Value of product controls outlays, 45. 
There are differences in land, 46. 



ANALYTICAL TABLE OF CONTENTS Xi 



Increase of population raises rent, 47. 
Lowers wages and interest, 48. 
Law of diminishing returns, 49. 
Urban lands, 50. 
Kent not a part of price, 51, 53. 
Margin of cultivation and prices^ 52. 

CHAPTER VIII 
Interest 95 

The demand for capital, 54, 55. 

The importance of time, 56. 

Interest is pr^paiium of present over future, 58, 59. 

How fixed, 60. 

Effect of machinery on wages, 61, 62. 

CHAPTER IX 

Wages and Distribution 108 

Eundamental question is product to divide, 63. 

Standard of living unimportant, 64. 

Bearing of demand and supply on wages, 65, 

Particular classes of laborers, 66. 

Harmony and conflict in relations of employers and 

employees, 67. 
Machinery raises wages, 68 ; because the tendency 

of profits is downward, 69-71. 

CHAPTER X 

Population, Increasing and Diminishing Returns 124 
Malthus and the English poor laws, 72, 73. 
Increase of population may lower the per capita 

product, 74. 
Diminishing returns, 75. 
Is over-population coming ? 76. 
Increasing returns, 77, 78. 



xii ANALYTICAL TABLE OF CONTENTS 
CHAPTER XI 

PAGE 

Money . . . .• 135 

Its usefulness, 79, 80. 

Necessary qualities, 81. 

Credit is one aspect of exchange, 82. 

Peculiar qualities of gold and silver, 83. 

There is no ideal money, 85. 

The silver question, 86. 

The demand for money is limited by the division 

of labor, 87 ; is increasing, 88. 
The value of money, 89. 

Quasi-rents explain the demand for money, 90-92. 
Supply of money, 93. 
Effect of increase of supply, 94. 
Credit and bank currency, 95. 
Government issues, 96. 
Gresham's law, 97-99 ; proves local expansions 

futile, 100. 
Commercial crises, 101-104. 
Advantages and disadvantages of credit, 105. 
Remedies, 106. 

CHAPTER XII 

The Competitive System 179 

Can humanity improve its own condition ? 107-110. 
Examination of present system, 111-114. 
Socialism examined, 115. 

CHAPTER XIII 

Population, Rent, and Socialism 191 

Disquieting doctrines not necessarily false, 116. 
Diminishing returns again, 117. 
Would socialism help ? 118. 
Increasing returns again, 119. 



ANALYTICAL TABLE OF CONTENTS Xlil 
CHAPTER XIY 

PAGE 

Some Current Questions in Economics .... 201 

Speculation, 120-127. 

Combination and Monopoly, 128. 

Trades-unions, 129. 

The Eight-hour Daij, 130, 131. 

21ie Sweating System, 132. 

Labor of Women and Children, 133, 134. 

Wages of Women, 135. 

The Tariff Question, 136-147. 

CHAPTER XV 
Taxation 237 

Is essential fact in government, 148. 

Governments are worth, more tlian they cost, but 

they cost, 149. 
No miracles in taxation, 150. 
All taxes fall on consumption, 151. 
Hovi^ best collected, 152 ; Practical rules, 153. 
The shifting of taxes, 154. 
Taxes on rent ; Henry George, 155. 
Taxes on interest, 156. 
Taxes on income, 157-159. 
Taxes on liquors and tobacco, 160. 
Taxes on inheritances, 161. 
Distribution between central and local government, 

162. 
Taxes on personal property, 162. 

CHAPTER XVI 

Consumption, Standards of Life, and Eashion . 257 
Which is first cause, production or consumption ? 

163, 164. 
Expansiveness of desires, 165, 166. 
Disappointing and non-disappointing desires, 167. 
Ostentation, 168. 



xiv ANALYTICAL TABLE OF CONTENTS 
CHAPTER XVII 

PAGE 

Conclusion 267 

Is business overdone ? In what directions is there 

room ? 169. 
What things in hfe are best worth while ? 170. 
The purpose of culture, 171. 



ELBMENTAEY ECONOMICS 



CHAPTER I 

SCOPE OF THE SCIENCE 

What do you suppose Political Economy is about? 
Would the study of the Australian ballot system fall 
within it? The popular election of senators? The sil- 
ver question? Money generally? The tariff question? 

Do you see any way in which Geology could bear on 
what you suppose to be economic questions ? Geogra- 
phy ? History ? 

Ought the economist to understand the processes of the 
iron industry? The science of electricity ? Chemistry? 

Have these anything to do with Political Economy ? 
How? 

Is more required than that the economist understand 
the laws and facts common to industries in general ? 

What are scientific laws as distinguished from moral 
laws and civil laws ? 

Is Economics concerned with the relations of employ- 
ers with employees ? 

Does the study of markets, values, and prices require 
the examination of transportation questions ? How ? 

How does climate become important in Economics ? 
Waterways ? Mineral resources ? Human wants and 
needs? Religion? Morals? Public health? General 
intelligence ? 

B 1 



2 ELEMENT ABY ECONOMICS 

Why should any one produce wealth ? 

Do you know any one who has more wealth than he 
needs ? Than he thinks he needs ? 

Is either condition likely ever to become common ? 

Does demand limit consumption, or is it supply? 

What is the practical limit to consumption ? 

Does average consumption depend upon the amount of 
money in the world, or upon the amount of wealth pro- 
duced? 

Suppose there were no money, how could the farmer 
use his grain to procure machinery or clothing? 

Do you see any respect in which this would be incon- 
venient ? 

In what sense can money be termed a common denomi- 
nator of values ? 



1. If one were to offer you a ten-dollar bill 
on the condition that you should always keep 
Why we use i*, you probably would not greatly 
money. prize the gift. Even were a ten- 

dollar gold piece offered you, and you were 
bound to keep it as such, not making it over 
into something of service or ornament, you 
would not very warmly thank the giver. Money 
is good to buy things with. Men in society 
and societies as a whole are well off, not in 
proportion to the money they have, but in pro- 
portion to what they can get to consume. We 
are used to selling things for money and to 
buying things with money, so that it comes to 



SCOPE OF THE SCIENCE 3 

stand with us as the most general symbol or 
representative of the things which we buy. 
Men commonly reckon their riches in terms of 
money, as we commonly state the value of each 
commodity in money. It would be inconvenient 
to exchange sheep for cattle, or tooth-brushes 
for iron. When we go to the concert, it is not 
practicable to pay in hay, or chickens, or jack- 
knives. The doctor or the newspaper man ob- 
jects to garden truck as pay. It is better for 
all concerned to pay in money and to allow the 
receiver to expend the money for the things he 
may desire. We use money as a common de- 
nominator just as, in arithmetic or algebra, if 
we are going to work in fractions, it is most 
convenient to reduce these fractions to a com- 
mon denominator. 

2. But what things we can get with our 
money, and not the money itself, is the impor- 
tant matter. People could g-et on 

. . Things and not 

Without money, making their ex- money the im- 
changes with each other directly P"^^^^^ f^°*' 
by trade or barter, though doubtless this would 
be inconvenient. So people in ancient times 
used cattle as money, the Indians in early colo- 
nial days used beads or wampum, the Virginia 
colonists tobacco, and even of late years in 



4 ELEMENTARY ECONOMICS 

some parts of the South, twists of perique 
tobacco have served as the medium of exchange. 
The use by children of pins in their small com- 
merce of store-keeping is a familiar fact. 

How much any people can have to eat and 
wear and enjoy — its share in the good things 
of life — must depend upon how much is pro- 
duced. Consumption is limited by production. 
It is a question of factories, and herds, and 
crops, and not of money. Money is the meas- 
ure — the common denominator of value — the 
medium of exchanging goods between men — 
and not the cause or the basis or the test of 
well-being. Doubling the amount of money in 
a country would not double the production of 
the fields and factories, or the strength and 
skill of human beings. All these would remain 
as they were before. Each of us would like to 
have his own money doubled, just as each of us 
would like an increased number of orders or 
of coupon books upon the grocer or dry-goods 
man. But increasing the coupon books would 
not increase the amount of goods which the 
grocer or dry-goods man has in his shop. In- 
creasing the money does not increase the com- 
modities. The aggregate production is the 
essential fact in any society. Who has the 



SCOPE OF THE SCIENCE 6 

orders or coupons for it — the money — is a 
question of who gets most in the division or 
distribution of the goods produced. We there- 
fore call the aggregate production of a nation 
or of a society the national or social dividend. 
The average of consumption is found by divid- 
ing the aggregate production by the number of 
shares in it; that is to say, by the population. 
Average consumption is of the nature of a 
quotient. 

Thus we see that those nations which used to 
make great efforts to acquire and keep in the 
country money or jewels and precious stones, 
were mistaking the symbol for the substance. 
It is as if a nation should regard itself as rich 
in proportion to its yardsticks or coupon books, 
or as if a farmer were to estimate his crop by 
the number of wagons he had in which to carry 
it to market. 

To say that the love of money is the root of 
all evil is a conveniently short but inaccurate 
method of expressing a great truth. Love of money is 
Cupidity in some of its forms is love of wealth. 
the root of endless evil ; but people want not 
money, — they want the things which money 
will buy. Only people with diseased brains 
care for money as a thing in itself. When we 



b ELEMENTABT ECONOMICS 

speak of the love of money, we use a sort of 
shorthand expression for the love of the things 
in life which are bought and sold. Money is 
the general form in which desires express 
themselves and temptations present themselves. 
But human needs and desires are the source 
of all well-doing, equally with all ill. If we 
wanted nothing we should do nothing. The 
evil is in the improper direction and insuffi- 
cient restraint of desires. Money is helpful 
because it enables us easily and conveniently 
to make exchanges of goods. Barter would be 
inconvenient and impracticable. 

3. This brings us to the difference in mean- 
ing between the terms "value" and "price." 
Value and This difference is important in 

Price. Political Ecouomy, though it is 

not always observed in common speech. When, 
in the technical use, we speak of the value 
of the thing, we mean what it is worth of 
other things ; when we speak of the price, we 
mean its value measured in terms of money. 
Thus a horse may be worth two cows, a cow 
five sheep. Put in terms of price, we should 
say that the horse was worth, for example, 
fifty dollars, the cow twenty-five dollars, and 
the sheep five dollars each. 



SCOPE OF THE SCIENCE 7 

4. Political Economy is, in a general way, 
an investigation of tlie manner in which men 
think and act in the business affairs Poetical Econ- 
of life, — a study of their activity omy defined. 
as related to the things which are bought and 
sold. Thus we are set to inquire about farms 
and crops, factories, stores, railroads, banks, 
wages, interest, rents, values, and prices, and 
the countless facts and influences bearing upon 
matters of this sort. Political Economy is not 
merely the tariff question or the money ques- 
tion, as many beginners are apt to believe, but 
a great deal more than this, and much of it of a 
great deal higher importance. Perhaps the fol- 
lowing will answer as a fairly accurate statement 
of the scope of our subject : Political Economy 
treats of men in their commercial and industrial 
activities from the standpoint of markets and 
values. 

SUGGESTIVE QUESTIONS 

Define, as far as you now can, the terms " value " and 
" price." 

If things were all doubled in price, what effect would 
this have on values ? 

Mention some relations of Chemistry to Medicine. Of 
Mathematics to Physics. Of Geology to Zoology. 

From the point of view of how many sciences can you 
discuss a stick of wood ? 



CHAPTER II 

MAN AND ENVIRONMENT 

Why is the polar bear white ? 

Why are many snakes striped? 

Why are some forms of life able to change in color to 
fit the color of the background ? 

Why have northern animals heavy coats of fur ? 

As far as we can see, is the world adapted to the forms 
of life upon it, or are the forms of life adapted to the 
world? 

Illustrate your answer from Botany and Zoology. 

What becomes of such forms of life as fail of adapta- 
tion ? What of the forms best adapted ? 

What is the " struggle for life " ? 

What influences limit or tend to limit the numbers of 
buffalo, trout, flies, rats, squirrels, men ? 

Are similar influences at work in the vegetable world ? 
How? 

The cultivated strawberry set in the field reverts to the 
type of the wild berry. Why? 

What influence would bring it back to the garden 
type? Why? 

Explain the fact that orchard apples have much pulp. 

Of what utility is the pulp to the wild apple ? 

Mention some kinds of seeds distributed by animals. 

How may color help toward distribution ? 

What is Natural Selection ? 

What is Artificial Selection ? 



MAN AND ENVIRONMENT 9 

What is Correspondence to Environment? 

Why are tropical races dark? Northern races vigor- 
ous and industrious? 

Mention such different elements of success in life as 
you can. 

On what does the raising of a good crop depend? 

Has a good chance in life much to do with success ? 

Why not raise bananas in Canada ? 

Could Shakspeare's plays have been written in the 
Sioux language ? Thought out in a Sioux civilization ? 

Are there any millionaires in Greenland? Why? 
Where are they found ? Why ? 

Is an opportunity to get a good education to be re- 
garded as part of yourself or part of your surroundings ? 

When you have obtained the education, which is it? 

Mention such necessary conditions as you can to the 
prosperity of a great silk factory. 

Apportion these elements into two classes, (1) those 
which are human in their character, (2) those which are 
not. 

Apportion these elements into, (1) those which pertain 
to the owner, (2) those which pertain to his surroundings 
and opportunities. 

Describe the social conditions necessary to the exist- 
ence of a great silk factory in (a) public tastes, (6) trans- 
portation, (c) machinery and mechanical skill, (d) motive 
power, (e) social security and morality, (/) laws, (g) in- 
ternational relations. 

5. Polar bears are found to be white ; snakes 
which live in the grass are green Adaptation to 
or striped; races of men living in ^™7/opr 
hot climates are generally dark, porttmity. 
We say that these things are due to the condi- 



10 ELEMENTARY ECON 03110 S 

tions in Avliich these different orders of animal 
life have lived. Bees taken to a climate of 
continual summer are said to lose their habit 
of accumulating honey. The fish in Mam- 
moth Cave are without eyes. 

Not only in animal life, but in vegetable life 
as well, similar facts are observed. Large trees 
grow in fertile soil and fostering climate, the 
finest vegetables in rich and Avell-tilled gardens. 
On the other hand, the cultivated plant set in 
the poor soil of the field to make its way against 
grass and weeds reverts to the type of its wild 
ancestor. 

Botany and Zoology should already haA^e 
taught the student this great law of adaptation 
in its two aspects of correspondence to environ- 
ment and of survival of the fittest. Lack of 
correspondence means disadvantage in the 
struggle for growth and life. This principle 
holds for man as well as for the lower orders. 
Human life and human society must be studied 
with constant attention to the conditions which 
surround and limit activity and development. 
Lidividual success in the contests of social life 
is not purely a question of pluck and brain; 
something^ must be allowed for education and 
opportunity. Good legs and a fair field are 



MAN AND ENVIRONMENT 11 

both needed for fast running. So in economic 
relations both actor and opportunity require 
examination. 

6. Thus the human race in its relations to 
its environment, and the individual of the race 
in his relations to an environment 
of which the other members of his 
race are themselves a part, are the subject 
matter of all economic and social study. Man, 
as one term of the science, is regarded as stand- 
ing over against an outside world of fact and 
circumstance. He is neither entirely the mas- 
ter of his fate, nor yet entirely the puppet of 
the forces by which he is surrounded. He is 
himself a force, a centre of energy and activity. 
He is one of the facts in the complex interplay 
of human with natural energies. If he re- 
ceives, he gives; if his environment rains its 
influences upon him, he puts forth his own 
efforts in adapting self to environment or en- 
vironment to self. He strives and resists and 
reacts. George Eliot has put the case help- 
fully, when, in supplement to the half-truth 
" Our deeds are fetters which we forge our- 
selves," she adds, "A3'e, but I think it is the 
world that brings the iron." The history of 
human development is the story of what cir- 



12 ELEMENTABY ECONOMICS 

cumstance has done for man and man for cir- 
cumstance — the play of outside forces upon 
him and his reactions thereupon. There are 
thus two forces in the problem of history, — 
man and nature. The resultant is the direc- 
tion of human development. 

7. This is not a difficult notion. As has 
already been stated, it is merely one aspect of 
that which men of science call the law of adap- 
tation or of correspondence to environment. 
Life, for each one of us, is a question of what 
there is in us plus what is outside — of our 
powers and energies in the face of our sur- 
roundings and opportunities. Give Crusoe his 
island, what will he do with it? This is in 
part a question of Crusoe and in part a ques- 
tion of his island. Likewise for races the 
problem is on one side a matter of character 
and capacity, on the other, of surroundings 
and opportunity. 

8. It is unnecessary for the purposes of 
Political Economy to push the question into 

an inquiry as to which of these 

No matter now ^ '^ 

wMch is pri- two forces in human development, 

^^' if either, is the primary fact and 

which the derivative. We may, for example, 

regard coral polyps as a product of the sea ; it is 



MAN AND ENVIRONMENT 13 

none the less true that once existing they not 
merely suffer but work the processes of sea 
change. It constantly occurs that a result 
becomes in turn a cause, — as, for example, 
in Chemistry, where a product of combination 
or decomposition furnishes a basis for a new 
series of chemical changes, or in Physics, where 
in a row of blocks one falls as the result of an 
impact received, and by delivering its impact 
causes the next to fall, or again in Chemistry 
where combustion liberates gases which them- 
selves furnish material for further combustion. 

Economic science is not, however, greatly 
concerned with the history of human develojD- 
ment; the main purpose of our discussion is to 
fix clearly and definitely the first important dis- 
tinction in economic theory — the division of 
its subject matter into the two terms of man 
and environment, the human and the non- 
human elements in the problem. Taking man 
as he is in relation to his environment as it 
exists. Political Economy treats of him in his 
commercial and industrial activities as viewed 
from the standpoint of markets and values. 

9. The production of wealth by man, so far 
as it does not rest with the character of the 
actor himself, must therefore find its expla- 



14 ELEMENTARY ECONOMICS 

nation in the nature of his environment, — in 
Production of the elements, in the varying condi- 
ra a) man^^ ^ tions of temperature, rainfall, snn- 
(2) opportunity, shine, humidity, healthfulness, etc. 
— in the soil, or, more accurately, in the land, 
its fertility and workability, its mineral re- 
sources, its convenience for industry 

Environment. 

and commerce; m the varying sum 
of natural forces more or less within the control 
of man, such as winds, tides, electricity, gravi- 
tation, and steam. This enumeration is of 
necessity both incomplete and inexact. Clim- 
ate cannot be definitely distinguished from 
winds, electricity, and light, nor can natural 
forces be treated apart from questions of navi- 
gation and convenience for commerce. Light, 
which may be used as a natural force for power 
or for the purposes of chemistry or art, is, from 
another point of view, an important factor in 
the fertility of the soil. But it is important 
merely to hold in mind that wealth depends 
upon the correspondence of two factors, — 
(1) man himself, (2) the conditions surround- 
ing him. He may, in large measure, modify 
surrounding conditions. But it will still 
remain true that the arctic regions and the 
tropical deserts do not offer favorable oppor- 



MAJSf AND ENVIRONMENT 15 

tunities for liis wealth-producing activities. 
He may adapt himself in some degree to an 
unhealthful climate. But, in some measure, 
an unhealthful climate must exercise an un- 
favorable influence on his powers. He may 
make for himself artificial lines of communi- 
cation, but rivers, lakes, and seas will retain 
an economic importance for this purpose. He 
may exist making small use of the opportuni- 
ties offered by natural forces, but it will remain 
true that in these rest the possibility of the 
greatest efficiency and the largest field for 
economic progress. 

10. Turning to a closer examination of the 
factor, man, we find wide differences between 
different races of men, and between ^^^ ^^ ^^^^^^^ 
different men of the same race, ty euvironment. 
We need not assert that all of these differences 
are due to environment; clearly enough, how- 
ever, some of them are. The human race ex- 
hibits the effects of correspondence otherwise 
than in color and physical power. Not only 
have men been profoundly influenced by their 
surroundings in health, strength, and stature, 
but also in habits, character, and intelligence. 
The student need only call to his aid his 
knowledge of Geography to find this many 



16 ELEMENTARY ECONOMICS 

times verified. Civilization is too difficult a 
problem in the frigid zones for any race yet 
fully to have solved it. The problem of mere 
existence in the tropics is so over-easy as to 
have degraded man, through stagnation and 
ignorance, into an incapacity for civilization. 

11. The student should now be able to ap- 
preciate the truth that wherever there is found 
a hipfh stage of civilization, or g^reat 

How explain . 

high and low prosperity, or a high average pro- 
^^^^^ duction and consumption of wealth, 

the explanation must always lie in the charac- 
ter of the people under examination or in the 
character of the country in which they live. If 
the people in China have less per capita to con- 
sume than the people in France, it is because 
the Chinese produce less per capita than do the 
French; and the explanation of this must be 
found in the lower vigor, or skill, or energy, or 
intelligence, or scientific attainments of the 
Chinese, or in the unfavorable character of the 
opportunities in which they live. If Ameri- 
cans are more prosperous and live better than 
Europeans, it must be that Americans are better 
producers, — more active, more inventive, more 
enterprising, — or that the soil and climate and 
other natural resources of America offer more 



MAN AND ENVIRONMENT 17 

advantageous opportunities for production. 
No one has great difficulty in understanding 
this principle as illustrated in tlie affairs of 
everyday life. Long ago it was remarked that 
not even the most skilful workman could make 
bricks without straw. Bad tools place the best 
of mechanics at disadvantage. Men do not 
gather grapes of thorns or figs of thistles. It 
takes more than a good farmer alone, or than a 
good farm alone, to make a good crop; this 
needs both farm and farmer. Only opportunity 
improved is success. 

12. It is obviously true that the producing 
powers of men are, in large measure, matters 
of physical strength and endurance. Man in energy 
Perhaps an equal measure of im- ^^^ ®^°^*' 
portance should be ascribed to agility and 
intensity of effort. The German economist, 
Wilhelm Roscher, writes in this regard: — 

"According to the reports of English manufacturers an 
English workman produces on an average ahiiost twice 
as much as a Frenchman ; the latter in turn more than 
an Irishman. An English wage-earner who had worked 
in a French factory speaking before the Parliamentary 
Committee gave his opinion of the French as follows : It 
cannot be called work they do ; it is only looking at it and 
wishing it done. Thus, for example, a good English spin- 
ner with an eight-hundred spindle machine could produce 



18 ELEMENTARY ECONOMICS 

daily sixty-six pounds of yarn ; a Frenchman only forty- 
eight pounds. . . . The report of an Agricultural-interest 
Commission places the North American workman above 
the English in good conduct, fidelity, and interest. A 
Berlin woodcutter accomplishes as much in ten days as an 
East Prussian in twenty-seven days. (Hoffman.) English 
planters on the Hellespont prefer to pay Greek laborers 
ten pounds sterling a year and their keep rather than 
Turkish laborers three pounds. So the Malay field- 
laborer gets two and a half dollars per month, the Mala- 
bar four, the Chinese six." 

Perhaps equally important in production are 
the distinctively moral qualities of men, and 
the social and moral conditions in which they 
live and for which they are largely responsible. 

Under modern conditions every corner of the 

world does business with almost every other. 

Business affairs are complex, of 

Moral qualities. . _ i i . i n 

enormous magnitude, and highly 
centralized. Great factories, employing thou- 
sands of men, sell goods all over the world. 
Their force of officers, clerks, and agents is 
necessarily large. The system of buying and 
selling on credit is widespread. Business 
must therefore be largely done on terms of 
trust and confidence. A high moral develop- 
ment in certain directions is essential to the 
success of this system, and any society lacking 
in this respect must suffer thereby. Not only 



MAN AND ENVIRONMENT 19 

this, but under present conditions most men 
must be wage-earners serving under employers. 
The productive effectiveness of society must 
therefore largely depend upon the good faith of 
the employees. 

No advanced society can reach its highest 
possibilities in production if men are not free 
to work for their own benefit and, 
if they so desire, under their own 
direction. Labor must be voluntary or it will 
not be vigorous and care-taking. Slavery or 
any other form of severing reward from effort, 
weakens the springs of motive, while at the 
same time relaxing the energy of those who 
wrongly profit thereby. Feudalism in the 
middle ages suffered by this defect. 

Likewise, no society which, through disorder, 
crime, war, or over-taxation, unsettles the con- 
nection between industry and reward, 
can fail of enfeebling its productive 
forces. Security of life, property, and invest- 
ment is essential to high economic efficiency. 

Again, in no society in which people lack in 
forethought for the future will work go on, un- 
less under stress of immediate need. 
The ability to wait, to see ahead, 
and to provide for the far-off want, drains the 



20 ELEMENTARY ECONOMICS 

land, clears the forests, plans the machinery, 
builds the railroads, and constructs the fac- 
tories. 

But most important among the characteristics 

of man as producer are his intellectual powers 

and acquirements. If we compare 

Intellectual 

powers and modern industrial processes with the 

acquirements. J_^ ^ £ • j. j_* j. 

^ methods oi ancient times, we get 

some notion of the importance of science and 
art in production. Especially in the world of 
economics is it true that knowledge is power. 
The savage made an enormous step forward 
when he acquired the knowledge of the bow and 
rod. Tools increase by many fold the effec- 
tiveness of human energies. But when, by the 
use of machinery, man has harnessed to his aid 
the forces of nature, the field of progress is in- 
finitely widened. By spindle and loom he mul- 
tiplies his product by hundreds. Steam and 
electricity, the printing press, the cotton gin, 
and the countless contrivances which make of 
every county fair a collection of marvels, and of 
every world's exposition a display of miracles 
— these are the fruits of that civilization into 
which each one of us is born as to a free heri- 
tage. And remember that behind the art and 
the skill in all these processes and methods. 



MAW AND ENVIRONMENT 21 

there is a world of pure science. No one has 
grown more grain than the chemist. The dif- 
ficult problems of industry are wrought out in 
the laboratory of the specialist. The investiga- 
tors and the inventors have revolutionized the 
opinions and the organization of the modern 
world. The ruling forces of civilized life are 
the intellectual forces. The moral code of 
eighteen hundred years ago left, indeed, not 
much to be added. Laws, governments, insti- 
tutions, science, art, invention, and discovery, 
— these are the facts which measure the dis- 
tance between civilization and savager}^ In 
these directions the progress of mankind is 
seemingly without limit. 

SUGGESTIVE QUESTIONS 

To what zones is civilization mostly confined ? Why ? 

Where did it originate ? Why ? 

In which direction, north or south, has it moved? 
Why? 

What physical reasons do you find for the lead which 
western Europe has taken in civilization ? 

What is the trouble with the polar regions in this re- 
gard ? With the tropics ? In (a) human needs, (6) ease 
of satisfaction? 

What determines the character of industries in Can- 
ada? In Colorado? In the Southern States ? 

What natural resources have made England the lead- 
ing manufacturing country of the world? 



22 ELEMENTARY ECONOMICS 

■ Explain by natural advantages England's commercial 
and maritime supremacy. 

In what sense was the American Rebellion a question 
of climate? 



CHAPTER III 

UTILITY AND WEALTH 

Can matter be destroyed? Or created? How about 
force ? 

What is the law of the conservation of energy ? 

What do we mean wlien we say that coal has been 
produced ? 

AVhat change is wrought by combustion ? By decay? 
By digestion ? 

In what respects do human needs coincide with the 
needs of the brute creation ? 

In what respects are there differences ? 

Do brute needs expand greatly in scope or intensity? 

Why do men produce wealth ? 

Do you think of any attribute common to all things 
which are desirable ? 

If you had ten dollars to spend what would you do 
with it? 

Would you probably buy one thing or several ? 

Which thing would you choose if you had the money 
to buy but one ? 

Are things of unvarying desirability to all men ? Of 
all nations ? In all seasons ? In all ages ? Give exam- 
ples. 

What conditions must exist (a) as to men, (5) as to 
the thing, in order that it be useful ? 

Books are not useful to savages. Why? But are 
useful to civilized men. Why ? 
23 



24 ELEMENTARY ECONOMICS 

Is this a material difference ? 
Is usefulness a quality or a relation ? Why ? 
What are the two terms in the relation ? 
What is matter ? What is it made of ? 
What is an atom ? How do you know that there are 
any? 

13. The French economist, Gide, neatly ob- 
serves that "The concern of the economist is 
Desires and ^ith the wants of men, — of the 
utility. lawyer, with his rights, — of the 

moralist, with his duties." Man is a creature 
of needs and desires. Primarily, and as a con- 
dition to his mere existence, he requires food, 
commonly also clothing and shelter. He has 
appetites for art, music, philosophy, cigars, and 
yice. He desires comforts and luxuries, pro- 
tection from the violence of nature, from the 
wrongs of men, and from the attacks of beasts 
and microbes. He wants his steak broiled and 
his clothes brushed. He likes to be preached 
to and sung to. He wants books and boats and 
race-horses, laces, parks, theatres, and eye- 
glasses, chairs, balloons, railroads, panoramas, 
fortune-tellers, phrenologists, and humbugs. 
In a secondary way he wants the machines and 
inventions and tools and processes by which his 
primary wants are helped towards satisfaction. 
Look at the price-currents, the tariff schedules, 



UTILITY AND WEALTH 25 

the inventories of stocks in trade, or the adver- 
tising pages of the daily paper, and you get 
some notion of his manifold desires. He wants 
also love and pity and respect and place, and 
sometimes these also are bought and sold upon 
the market. All these things he wants because 
they minister to his desires — that is to say, 
because they are, in his opinion, useful to him. 
The one characteristic common to all objects of 
human desire is this quality of service to a 
human requirement. This attribute of service- 
ability the economists term utility. That is, 
the term utility is used in economics to mean 
desirability in relation to a person who desires. 
The thing or fact possessing this attribute of 
utility is called a good. Wealth includes all 
.material goods that have value. 

14. Note that the commendable character of 
the desire in question or the good sense of its 
satisfaction is not suggested in the utility is not a 
economic use of the word utility, moral question. 
Men put forth effort and undergo privation for 
the possession of whiskey, cigars, and burglars' 
jimmies, as well as for food, or statuary, or har- 
vest machinery. As long as men are influenced 
by evil purposes, or by ignorance, to buy and 
sell foolishness and evil, so long the student 



26 ELEMENTARY ECONOMICS 

must recognize these desires as economic facts, 
and the commodities as of market standing. 
Whether we like it or not, utility, as an 
economic term, means merely adaptability to 
human desires. 

15. To produce is not to create. So far as 
we know, neither matter nor force can be created 

or destroyed. The law of the con- 
Men do not 

create but scrvation of energy appears to be 
rearrange. ^^ universal validity. Waste and 
decay are the mere breaking apart of matter — 
the taking on of new forms — the undergoing 
of new distributions. Motion may be changed 
to heat, heat to electricity, but the equivalence 
is constant if all wastes and leakages are al- 
lowed for. 

Economic production is the putting of things, 
into places, combinations, or times so that the 
things take on or increase their usefulness — 
that is to say, acquire fitness for satisfying 
human needs and desires. The growing of 
wheat, for example, is merely a process of se- 
lecting and combining materials already exist- 
ing in the earth and the air. Dirt may be 
roughly described as the right thing in the 
wrong place. A drop of syrup on the floor or 
on the tablecloth is filth; in a dish it is food. 



UTILITY AND WEALTH 27 

So, to change the location of a thing, the 
mere act of transportation — for examjDle, rais- 
ing iron from the mines or bringing soda from 
the plains — is an act of production. Likewise 
mere preservation may, through lapse of time, 
serve as production, as in the keeping of ice 
from winter to summer. 

16. Thus to measure wealth in any degree 
in terms of material existence is misleading. 
There is no more matter in the 

There is no ma- 

world at present than there was a teriai measure 
thousand years ago; but matter has ° ^®^* ■ 
been modified so as better to answer human 
needs. The house which was mere clay or 
stone, the cloth the material for which was not 
grown but was in the earth or the air, are now 
wealth to mankind. Work produces no new 
matter, no new forces. The applicability of 
matter and force to human uses does change. 
The iron in the earth mined, melted, freed from 
impurities, hammered and fashioned, forms a 
pocket knife. Nothing has been added to the 
matter of the earth; something has been added 
to the wealth. 

Thus as human needs, desires, and know- 
ledge expand, there is, by that very fact, room for 
an increase in wealth. "Of the one hundred 



28 ELEMENTARY ECONOMICS 

and forty thousand species of vegetable life we 
How wealth in- ^^^^ ^^^7 three hundred of sufficient 
creases. value to Cultivate ; and of the thou- 

sands of species in the animal kingdom we make 
use of but about two hundred " (De Candolle). 

17. Wealth therefore develops along two 
lines: (1) by changes which man impresses 
upon the outside world in making it more fit 
for his uses ; (2) by changes in man himself — 
in strength, in knowledge, in desires — by 
which he becomes better able to make use of 
the outside world. Pianos could not be wealth 
in a society lacking musical tastes, or books 
wealth to savages. That a mineral becomes 
wealth presupposes a human use to which it 
may be put, an ability to mine the mineral, and 
a knowledge to adapt it to use. It is this 
capacity of service, this attribute of utility, 
which marks all objects of desire and brings 
them within the broad classification called ^oo6?s. 

18. There are, however, goods which are 
^ . commonly termed not wealth but 

How services '^ 

differ from scrviccs. A book is Wealth, or a sheet 
of music, or a piano. These afford 
us pleasure or advantage. They may be pre- 
served, handled, possessed. That is to say, 
they are fixed and embodied in matter. But 



UTILITY AND WEALTH 29 

we are equally and as truly served by the 
advice of the physician, by the efforts of the 
singer or the actor, by orators, preachers, and 
teachers. These goods, which are termed by 
the economists services, are very important 
facts in life, and furnish the occasion for a 
large share of our expenditures. On the street 
car or the railroad we pay for being carried. 
The policeman, the judge, and the lawyer 
supply us, in security, direction, and advice, 
with things we acutely need. From house- 
hold servants we purchase attention, care, and 
attendance. In truth, it is sometimes hard to 
draw the line between services and commodi- 
ties. We eat the broiling of our steak as truly 
as our steak. Thus the performance of a ser- 
vice must be accounted an act of production, 
since it is the creation of utility. 

SUGGESTIVE QUESTIONS 

What do you mean by intrinsic or extrinsic utility? 

Intrinsic or extrinsic value ? 

Are charms and rehcs now greatly prized? Have they 
changed their intrinsic qualities ? 

Are color and taste intrinsic qualities ? 

Did Niagara roar before there were ears? What is 
sound ? 

Is heat a quality of an outside thing, or a mere effect 
upon the senses ? 



30 ELEMENTARY ECONOMICS 

Is the difference in value between winter and summer 
ice an intrinsic or an extrinsic matter ? 

Why not call singing wealth? or acting? or preaching? 

A dog has been trained to guard sheep; is this an 
increase in wealth? Is it a material or an immaterial 
increase ? 

Is the ability to sing wealth ? 

Define services. 



UTILITY AND WEALTH {Continued) 

Is food wealth ? 

Is the strength which comes from it wealth ? 

Is medicine wealth ? 

Accurately speaking, can any one's face be his fortune ? 

Suppose that A devotes a year to clearing the land for 
a farm ; B to constructing a locomotive ; C to perfecting 
an invention ; D to the study of a profession ; which of 
these are cases of wealth-production ? 

Are intellectual acquirements wealth ? 

Is health wealth ? Eyesight ? A good voice ? Strong 
muscles? Inherited character? Oar digestive apparatus? 
Our bodies ? Our minds ? 

19. A distinction must be made between 
those things in the outside world which are 
Man, and things "Liseful to man and those things 
outside man. which, in the last analysis, are a 
part of man himself. Bread, for example, is 
clearly enough an outside good, an external 
thing adapted to human needs. How after it 
is eaten ? We say that it has been consumed. 



UTILITY AND WEALTH 81 

It no longer exists as bread. Its service has 
been rendered in maintenance of life or increase 
of strength. But how shall we regard this re- 
sult, this strength? In the primary division of 
economic facts into man and environment, does 
bread fall into one classification and strength 
into another? The thing was bread; it is now 
life or strength. Is it now something possessed 
by man, or is it a part of man himself ? Is it 
subject or object, possessor or possessed, man or 
environment ? 

Man is the beginning and the end of produc- 
tive effort. The creation of utility is purposed 
by him for his consumption. He puts forth 
effort that he may enjoy its rewards. The 
economic cycle begins and ends in him. He 
works that he may live. He is the producer 
and not the thing produced. The more 
strength the better producer — later 

° Only the outside 

the larger product ; but the strength things are goods 
is not product. So the mixtures 
prepared by the chemist, and the doctor's com- 
poundings of medicinal gums, fall within the 
class goods, while my good health to resist 
contagion and your good sense to avoid it are 
ranked as human attributes. 

Note, however, that Avhile the knowledge 



32 ELEMENTABY ECONOMICS 

which avoids disease is a human attribute and 
is not wealth, the outside fact from which this 
knowledge is obtained, the book, or the advice 
of the physician, is either wealth or service. 
The mental power of the physician, his know- 
ledge, however, is not wealth ; it is the source 
of his ability to do a useful thing, to speak a 
word or write a prescription which shall be 
of advantage to another human being. This 
knowledge is a part of the physician's equip- 
ment for the production of utility. When this 
equipment shall come to service the result will 
be a good. As equipment, however, it is not 
utility or good but physician. 

QUESTIONS 

Define utility. 

Why is not knowledge wealth ? 

Are all outside goods wealth ? 

How about services ? What is the line of distinction ? 



CHAPTER IV 

THE FACTOES IN PRODUCTION 

In what respects has man changed his environment to 
suit his purposes? Give instances. 

What things would you need when going into wheat 
raising? Into piano making? 

What different reasons might one have for saving 
money ? 

What for hiring money ? 

What for hiring land ? 

20. Suppose that there is a demand for some 
commodity, fish, for example. Given this de- 
sire for fish as motive force, we have . 

Are man and 

now to inquire what other condi- opportunity 
tions are essential to obtaining the 
commodity. In the simplest possible case two 
facts must concur, — there must be a fisher and 
a place for fishing, — man and environment. 

But ordinarily something more than the 
primitive environment is necessary; in most 
cases of production some sort of tools or appli- 
ances must be had. Suppose it to be raw cot- 
ton that one wants to produce. There must at 



34 ELEMENTARY ECONOMICS 

least be seed ; there ought to be various appli- 
ances to be used in the process of cultivation. 
But now suppose that the cotton is intended to 
be made into cloth. In this case there must 
certainly be more than worker and opportunity 
to work ; there must also be something to work 
with. 

Mankind has a world in which to live and 
work, land to cultivate, streams to make his 
wheels turn, water to convert into steam, and 
coal with which to convert it. But something 
more is needed. Even the primitive fisherman 
finds it desirable — often indeed necessary — 
to have poles, lines, and nets. Farming would 
not greatly prosper with nothing for the case 
but a farmer and the natural opportunity. The 
farmer needs tools and machinery; he must do 
some "getting ready " or some one must have 
done it for him. 

The weaver requires still other and more 
complicated appliances. At least he must have 
his hand spinning-wheel and his loom. His 
work gains enormously in effectiveness when he 
is able to work in a factory with great power 
engines to help him, and with the spindle and 
loom of modern industry. 

21. Between man and nature there is, then, 



THE FACTORS IN PRODUCTION 35 

a kind of intermediate term, that which we 
call capital. The things which are Tools and ma- 
called capital are not a part of man, cMnery capital, 
they are a part of his surroundings, and yet 
differ from land or nature in this, that they are 
the result of man's activity; they are an addi- 
tion to the original condition or opportunity. 
Ultimately speaking, capital is nothing but 
stored-up labor. ^ When one wishes to bring 
about some particular result, it is often best to 
take a roundabout method. If, for example, a 
man intends to dig up stones, it may be best, if 
he has much of it to do, first to make a lever 
or crowbar with which to apply his strength 
or multiply its effectiveness. If he intends to 
raise wheat he will ordinarily find it best first 
to adapt his land to his purposes by clearing, 
ploughing, and manuring, or by improving it in 
some other way, or by obtaining work-animals 
to aid him in his task. This labor of preparation 



1 The student is not to regard this statement as a definition, 
hut as an account of the origin of capital. A machine is a typi- 
cal example of capital. Ordinarily a machine is produced in 
some measure by the aid of machinery already existing — that 
is by capital. So again, the wood work of the machine was pro- 
duced by the land. But it is none the less true that, traced far 
enough back, all that which is not due to the original environ- 
ment is due to the effort which has been applied to that environ- 
ment. Strictly defined, capital is all wealth, other than land, 
used to aid in the production of wealth. 



36 ELEMENTARY ECONOMICS 

is sometimes enormous, as when the giant 
factory is erected, with all the machinery and 
appliances which it contains ; or when, instead 
of carrying things upon the back, men build 
costly roads and bridges, rear beasts of burden, 
and construct wagons and drays ; or, going still 
further, construct great railroad or electric sys- 
tems with all their costly and intricate arrange- 
ments of tracks, cars, locomotives, and stations. 
All these extensive preparations for production 
are really the same thing as the loom or the 
plough: they are savers or multipliers of human 
power. We call them labor-saving appliances ; 
they are forms of capital. 

Thus within his environment man thinks 
and acts, works, manages, and contrives. He 
has his own energies to work with, land and 
nature to work through and upon ; with the help 
of these he fashions and prepares his different 
appliances which we call capital. 

Factors in production -| ~~" r capital. 

[ environment -j 

[ land. 

22. The advantages derived from machinery 
in production are commonly due to the fact that 
the machine brings into more effective co-opera- 



THE FACTOBS IN PRODUCTION 37 

tion with man the forces of nature. This truth 
is expressed clearly in the familiar 

. . In what lie the 

distinction between hand-labor and advantages of 
machine-labor. It is probable, how- '^^'^^''^'^ 
ever, that we fail to realize to the full the 
wonderful possibilities and meaning of ma- 
chinery for mankind and human civilization. 
The trip-hammer and the pile-driver strike the 
blows of gravity. Water power is the pressure 
of gravity harnessed to the service of men. 
Niagara is about to turn the wheels of industry 
for half the cities of the East. The tides and 
the winds are not yet fully tamed to our uses, 
but long ago were discovered the treasures of 
power where the sun has stored up its heat in 
the deposits of coal. We may yet learn to 
gather the energy of heat rays directly, as we 
are now rapidly finding out how to turn to our 
service the pulse and throb of electric energy. 
But even ages ago the farmer had learned to 
plant his seed and wait for the sun and the 
rain to mature the harvest, while the wind was 
set to pump the water and grind the corn. 

SUGGESTIVE QUESTIONS 

Mention some of the great inventions. Show whether 
they have benefited mankind and how. 



38 ELEMENTARY ECONOMICS 

Mention cases in which scientific knowledge lias modi- 
fied the processes of production. 

What effect does machinery have on the aggregate 
social product (social dividend) ? On average consump- 
tion of goods ? 

Does capital help the borrower? How? Society? 
How? 

Does the land produce the crop ? Does man produce 
the crop ? Has capital any share in it ? 

WAGES, PROFITS, RENTS, AND INTEREST 
DEFINED 

Does the wage-earner in the factory produce the cloth ? 

Who else help ? 

How about the designer of the patterns ? The chem- 
ist who compounds the dyes? The investigator who 
worked out the formulas? The capitalist who furnishes 
the machines? The office-clerk who keeps the books? 
The foreman w^ho oversees ? The owner who directs ? 

Who produced the building? 

Who produced the food for the carpenters and the 
masons while they worked ? 

Who paid for the food ? Where did he get the where- 
with to pay ? 

Why does the owner want men to work for him ? 

Why should not the men prefer to do something else? 

Why does the owner consent to pay interest ? 

Would you call interest received on a note profit ? 

Rent of a house ? 

A dividend on bank stock ? 

Salary received and spent ? 

Salary received and put by? 

Wages received and spent ? 

Wages received and put by ? 



WAGES, PROFITS, RENTS, INTEREST 39 

23. It is commonly true that useful things 
are produced by the union, in varying pro- 
portions, of the different productive agents. 
Often, however, it is true that the capital be- 
longs to one man and the land to another. It 
is often true, also, that one man hires other men 
to work for him. Suppose, for exam- 

What factors 

pie, that you start a market garden, co-operate in 
renting land, borrowing your tools, P^° ^°*^°^ " 
or the money with which to buy them, and hir- 
ing a man and a boy to work for you. You must 
pay to the landowner something for the use of 
his land, — to the man who supplies the tools 
something for his capital, — to your employees 
something for their work. What is left after 
your different expenses are covered goes to you 
as the reward of your individual effort — your 
thinking, your planning, and your risk. 

These different compensations are given dis- 
tinctive names in Political Economy. 

Your own reward is profit. 
Your laborers' reward is wages. 
The landowner's reward is rent. 
The capitalist's reward is interest. 



Productive 

agents 



r wages. 
man, remunerated in -! 

[ profits. 

r capital — in interest, 
environment \ 

I land — in rent. 



40 ELEMENTARY ECONOMICS 

24. There is room for confusion with regard 
to this term profit. 

The word is used in ordinar}^ affairs with per- 
plexing indefiniteness. One man means by 
Necessary to profit that surplus which remains 
use the word ^^ ^^^ ^^^^^ charging, against the 

pronti 9<ccTi" 

rateiy. gross gain, interest and rent and 

a fair compensation for his own services. 
Another, a storekeeper, owning his own store- 
building worth 15000 and carrying a stock of 
goods worth $10,000, makes a gross gain per 
year on his sales of 14000. This $4000 is 
merely the difference between the cost price 
and the selling price of the goods he has sold. 
It is not unusual to find this whole $4000 
included in the term profit. A second mer- 
chant would insist upon deducting interest on 
the capital invested in land and stock, say $900, 
and would regard the residue of $3100 as profit. 
Another would deduct also the value of his own 
time and effort, say $1500, and would allow 
but $1600 to stand for profit. Yet another 
would look at his inventory of wealth at the 
end of the year as compared with the beginning, 
and would regard as profit whatever increase 
had been made, treating his living expenses as 
part of his expenses of business. 



WAGES, PROFITS, BENTS, INTEREST 41 

Were one to ask a real estate speculator what 
profit he had made upon a lot costing him $1000 
which he had held for one year and sold for 
$1500, he would answer either |500 or |500 
minus interest, and if asked what he had done 
with the profit, he would have no hesitation in 
replying that he had used it in his living ex- 
penses, nor would it ever occur to him in fixing 
his profit to deduct the wages of his own super- 
intendence. His business is to make profits 
and to live off them as a wage-earner lives off 
his washes. So with the trader in m-ain or live 
stock. And in no one of all these cases would 
it ordinarily occur to charge up anything for 
risk of loss. 

Crusoe, if asked at the close of his harvest 
season what the season's work had profited him, 
or what wages he had made, would probably 
interpret the question as an inquiry into the 
effectiveness of his season's labor after deduct- 
ing his outlays of seed and the wear and tear of 
his primitive appliances. If he could have 
done better on another piece of land, or with a 
different crop, he would not find it unnatural to 
say that another course would have been more 
profitable. In this sense evidently all j)roduc- 
tive effort is profitable as compared with idle- 



42 ELEMENTARY ECONOMICS 

ness. Different lines of production are only 
relatively, never absolutely, unprofitable as 
long as anything remains above expenditure. 

25. The sense in which the term is used 

in this Crusoe illustration, is the economic 

sense extended and developed to 

Profit may be 

absolute or apply to the complex relations of 
reative. ^j^^ business world. In this view 

profit is one form of remuneration for labor — 
for human effort. 

The existing industrial system is a competi- 
tive system organized upon lines of division of 
labor and exchange. Social life adds important 
factors to the Crusoe problem. Division of 
labor becomes possible only on terms of possible 
exchange of products. We will suppose, for 
illustration, that a man needs or desires ten 
different sorts of commodities which he may, if 
he will, produce for himself. If he finds that 
by producing some few or one of these com- 
modities in large quantities, and obtaining the 
others of the ten by exchanging for them some 
portion of his product, he can thereby obtain in 
the aggregate a greater sum of satisfactions 
than by the other method of direct production, 
he will make use of the opportunities afforded 
by exchange. In this he simply follows the 



WAGES, PROFITS, BENTS, INTEREST 43 

prospect of the greater profit, and if the out- 
come justifies his expectation his labor is rela- 
tively profitable. Even if the outcome is 
disappointing, his labor may be absolutely 
profitable. 

The further development in the exchange 
system by which the producer employs not 
only his own activities, but the activities of 
others, ■ — immediately in the form of services, 
or remotely in the form of commodities, — does 
not involve any essential modification in the 
nature of profit. 

26. Profit is perhaps best regarded as one 
form of the remuneration of labor, and as essen- 
tially in strict parallel with wages. Distingmshed 
Had usage so decreed, the two terms ^^°°^ wages. 
might well have been merged in the one term 
wages.^ But as the terms are established in use, 
profit points to remuneration without the inter- 

1 The student should be warned that the economists do not 
agree in the definition of the term profit. The earlier econo- 
mists considered it to include interest and pay for risk as well 
as pay for time and care. It is now more commonly thought 
that the returns on capital, as such, should be excluded, being 
covered by the term interest; though it is not always easy in 
practical business to separate interest from profit. 

Accurately the term profit seems to mean the wages of him 
who takes the risk — on whoso wealth or credit the hazards of 
the business rest, and to whom the gains of good management 
or good fortune are to go. If the profit maker is a borrower or 
an employer, he guarantees fixed sums in interest and wages. 



44 ELEMENT ABY ECONOMICS 

vention of an employer, — where the laborer is 
himself the projector (imprenditor, undertaker, 
entrepreneur, Unternehmer) of the enterprise. 
Wages indicate the intervention of an employer. 
Profit may be conceived as a form of wages re- 
ceived from society as employer. Rightly con- 
sidered, all individual workmen, other than 
wage-earners, are imprenditors. That enter- 
prise promises to be relatively profitable which 
affords the prospect of a better return to the 
imprenditor than with equal sacrifice he may 



I^enders and wage-earners have no care of the outcome of the 
business. 

The real difficulty is in what to do with this risk share of 
profit-maker's return. If men take chances of loss, they 
naturally look for the greater gain, if the enterprise succeeds. 
Is this gain a part of profit or something outside ? In practical 
business it is hard to separate this risk share from the rest, just 
as it is hard to divide interest into payment for the use of wealth 
and payment for the risk of not getting it back — that is, into 
pure or net interest and risk interest. The best way on the 
whole, it seems, is to divide gross profit into pure profit and risk 
profit. 

The objection to this is that, just as when one lends his capi- 
tal, he charges something extra for risk and calls it interest, so 
when he puts his own capital at risk in his own business, it 
seems by analogy that he should reckon his risk-gain as part of 
his interest on his invested capital. Particularly is this a tak- 
ing view when we recall that the losses of any enterprise must 
really be paid out of the operator's wealth. Profit-makers pay 
losses, when losses come, in their capacity of wealth owners and 
not of mere operators. 

From any point of view the risk question is an awkward 
thing to handle ; but as we shall use the word, pure profit is 
merely an aspect of wages. This use seems desirable as follow- 
ing out the distinction between man and environment. 



WAGES, PROFITS, BENTS, INTEREST 45 

reasonably expect in another line of activity. 
And if no line of activity promises profit, as 
compared with wage-earning or with produc- 
tion for direct personal consumption, the im- 
prenditor can, without sacrifice, betake himself 
to one of these courses. 

27. In the present form of social organiza- 
tion, that life which excludes exchange and 
any form of industrial interdependence with 
one's fellows, is practically out of the question. 
We may therefore safely consider that some 
one of the different forms of wage-earning 
furnishes for each man that form of activity 
from which the comparative profit of any other 
activity is to be estimated, and to which, meet- 
ing elsewhere with unsatisfactory rewards, he 
may betake himself as a last resort. 

From this point of view, the intimate asso- 
ciation of wages, profits, and interest becomes 
manifest. If wages are anywhere found to be 
high, profits may also be expected to be high, 
— in any event as high as wages, — since 
otherwise employers and self-directed laborers 
would tend to become wage-earners. Also 
where labor is productive of large results in 
goods, capital, which is an indirect application 
of labor to like ends, may normally be expected 



46 ELEMENTARY ECON 031108 

to be liiglily productive of goods, and therefore 
to command a high rate of interest. 

SUGGESTIVE QUESTIONS 

Does nature produce anything? Does it produce every- 
thing ? 

Is man a producer ? 

What do you call his productive activity ? 

Is labor the only productive thing? 

In what different forms is labor remunerated ? 

What aids does man have in production? 

Does he consume immediately all that he produces? 
Why not? 

What do you call that part of this residue which is 
used as an aid in production? What do you call its 
compensation ? 

Is a lawyer a producer? A minister? A cook? A 
factory hand ? The employer of a factory hand ? A school 
teacher ? 

What do you call their respective remunerations ? 

A farmer has a farm worth $1000, machinery and 
stock worth $1000, hires a man at $300 per year, works 
himself, gets $1000 worth of crop. Apportion this into 
wages, interest, rent, and profits. 

A carpenter takes the contract for the carpenter work 
on a building at $1000, works six months himself and 
pays his men $800. It cost him $300 to live during the 
six months. He might have worked by the day, receiving 
$400 in wages. What is his profit ? 

Is it possible to have absolute profit and relative loss? 

" Every misery that we miss is a new blessing ; there- 
fore let us be thankful." (Isaac Walton.) Criticise this 
doctrine. 



CHAPTER V 

VALUE 

If employees insist upon wages more than equalling 
the market price of their product, what will the employers 
probably do ? 

If wages, together with interest and other outlays, 
leave no balance for profit, what result is probable ? 

What motives would induce you to hire laborers at 
the ruling rates of wages, or to borrow money at the 
ruling rates of interest ? 

Is labor valuable in itself ? What fact gives it value ? 

Does this reasoning apply equally to ca^^ital and in- 
terest? To land and rent? How? 

Why do some producers stop producing when prices 
fall? 

What do they do then? 

What commonly fixes the price which the country 
storekeeper pays for eggs ? 

When one hires laborers, borrows capital, or rents land, 
on w^hat basis is it decided how much he shall em]3loy of 
any one of these? 

Why raise beef instead of mutton, or wheat instead of 
flax? 

28. When you hire land, employ laborers, 
and borrow capital for the purpose of raising 
garden "truck," your payments of rent, wages, 

47 



48 ELEMENTARY ECONOMICS 

and interest are made or promised in antici- 
pation of the products which you sell. The 
Relation be- amounts which you will consent to 
tween selling pay in the total must fall inside the 

price and wages, 

rent, and inter- amount which jou expect to receive 
®^*" from the sale of your product. What 

you have left above your outlays is your own 
pay, or, in technical language, your profit. If 
by your own estimate you could have done 
better in some business other than market gar- 
dening, you would not have tried this line of 
production. Thus your products must be ex- 
pected to cover not only your total expense, 
but as well an indemnity to yourself for not 
having done something else. 

There is, then, in all cases of production the 
question of what men — capitalists, landlords, 
wage-earners, and employers — are to share in 
the result, and in what proportion. What fixes 
how much you shall pay in wages to your 
laborers in order to get their aid in your under- 
taking? What determines in what measure 
the landlord or the tool-owner is to share in 
the product toward which each has contributed ? 
In a general way of course you pay as much as 
you must; they make you pay as much as they 
can. But how much? 



VALUE 49 

What you can at the outside pay depends of 
course upon what you receive for the product. 
It is time then to analyze the processes by 
which market prices and values are fixed. 

29. In most lines of production men know, 
before they produce a thing, pretty nearly what 
they can sell it for after it is pro- Outlays are 
duced. The stores are filled Avith pation of selling 
goods and there is every day a fairly P"°®' 
definite price for them. These prices change 
somewhat, but not ordinarily very widely or 
very rapidly. We all know in a general way 
about how much most things are worth. Even 
with such things as crops, people know months 
or seasons ahead about what it is reasonable to 
expect in prices, and each farmer plants accord- 
ing to his "guess." Taking an average of 
years, wheat or potatoes or hay will be found 
to command a fairl}^ definite price. 

This is a surprising fact, when you come to 
think of it, that everything has its reasonably 
definite price to-day, and that we Possible to 
can count with reasonable certainty ^stimat°es^of 
upon the prices of the future. At selling prices. 
all events the future is so far to be depended on 
that men are willing to enter this or that line 
of business, or to undertake this or that line of 



50 ELEMENTARY ECONOMICS 

production, receiving at the end the prices 
which rule when the product is ready to be 
sold. The prices which rule -to-day mostly 
furnish the basis for estimating what the prices 
will be. One knows approximately what it 
will cost him to produce a given article. He 
can tell what he could get for it if it were 
ready now. He can foresee roughly what he 
can get for it when, after a few days or months, 
it shall be ready. All things are produced for 
prices as they are or as they are expected to be. 
If it were otherwise — if there were no basis 
for hope, no place for reasonable expectation — 
very little would be produced, for almost all 
production takes time, and most of the expenses 
have to be incurred before the product is ready 
for sale. How much one shall pay per day 
in wages, what he can afford to invest in 
machines or lands or buildings or raw materials, ' 
how high interest it will do to promise, and 
how much capital it is worth while to borrow, 
all of these questions must depend on what the 
product can be sold for when the producer is 
ready to market it; and it is only by basing 
his estimates upon the selling price which is to 
be, that any man will become renter, borrower, 
investor, or employer. 



VALUE 51 

30. It is evident that people produce things 
because there is a demand for them — because 
they will sell — that is, will exchange on de- 
sirable terms for other things. One expects 
to get money for his product and with this 
money to buy such other products as 

People produce 

he needs. Each man produces be- because there is 

11 !• , ,• r i^ demandi 

cause he has desires to satisiy, and 
produces that which will supply the demands of 
others, expecting thereby to obtain from them 
the wherewithal to supply his own desires. 
Desire or demand lies back of all production. 
The ruling market prices are the expression of 
the demand as it exists. Thus, if we are to 
understand the forces which lie behind produc- 
tive effort, if we are to comprehend the way in 
which demand causes and directs production, 
it is again evident that we shall have to under- 
stand the way in which prices are fixed; we 
must study the processes by which market 
values are determined. 

SUGGESTIVE QUESTIONS 

Is the laborer commonly paid out of the very products 
he has helped to produce ? 

Is the payment of wages commonly deferred till the 
sale of the product, so that the laborer gets a share of 
the very money for which his product sells ? 



52 ELEMENTARY ECONOMICS 

In what sense is the value of the j)i'oduct the source of 
wage, rent, and mterest payments? 

At the end of the week's or month's work has the em- 
ployer received his equivalent for the wages paid, even 
though the product is still in the warehouse ? 

In what sense is the employer a daily purchaser from 
his employee ? 

Trace the parallel between the relation of farmer to 
egg-merchant, and of wage-earner to employer. 

Is the farmer paid out of the value of his product? 
In what sense? 

Does any man live out of the value of his product? 
In what sense? Is this as true of wage-earners as of 
other persons ? 



VALUE {continued) 

Would any system of Political Economy be possible 
for a man alone on a desert island ? 

Is there any sense in which Crusoe could be said to 
buy one thing with another or to exchange things ? 

Mention Crusoe's probable wants. 

Which would be the more pressing? 

What would he set himself to obtain first ? Secondly ? 
Thirdly? 

What would determine him to change from first to 
second? 

What would be the reason for his working ? 

Why do men in society work ? 

Do we live to eat or eat to live ? 

Do we live to work or work to live ? 

Why does water sell for less than wine? Iron than 
gold? Wool than silk? 

Does a clerk in a candy shop eat much candy? A¥hy? 



VALUE 53 

Why bring wood or hay to town ? Is this bringing an 
act of production ? What does it produce ? 
Is this increase in vahie intrinsic ? 

31. It is a commonplace fact that if you are 
going to sell things at a very high price, you 
will not sell many of them. While t 

•^ Lower prices 

bananas are ten cents each, most mean larger 
people purchase in limited quan- 
tities. If. I am exceedingly hungry for bana- 
nas I may buy one at this price. As the 
price falls my desires express themselves in 
larger numerical volumes. While my wants 
have not in truth enlarged, there have new 
conditions arisen in which banana appetites of 
lower intensity come into play, as one may 
imagine to himself the gradual subsidence of a 
lake or sea, and the appearance one after another 
of reefs, and bars, and islands. 

It does not follow, however, that with in- 
creasing plenty and falling price I shall enlarge 
my consumption without limit. No 

But there is a 

matter how cheap bananas get, there limit -desires 
must come a point at wdiich I 
shall consume no more. Apples sometimes rot 
upon the ground or in the cellar, because we 
have more than we want. That is to say, use- 
ful things may exist in such abundance as to 



54 ELEMENTARY ECONOMICS 

have no value; you cannot sell them or even 
give them away. Water, for example, may be 
worth nothing — not that any particular amount 
of water has become less capable of satisfying 
human needs, but because the supply of water 
outruns the total need. Some part of the total 
stock is thus absolutely without utility. This 
is simply another manner of saying that human 
desires and needs are not infinite in any par- 
ticular direction, and this again means simply 
that needs and desires become less intense with 
partial satisfaction. One does not ordinarily 
care as much for a second glass of water as for 
the first. Were this not true our work could 
bring us no great good, eating would leave us 
always hungry, and our wealth would afford us 
no comfort or content. 

The same principle is illustrated in our daily 
expenditures, and explains how we come to 
make them as we do. No one applies his entire 
income to the purchase of food or shelter. 
Food is the primary necessity, but clothing is 
more acutely required than is a second dinner. 
We supply our wants in the order of their in- 
tensities. When one has purchased himself a 
reasonably large wardrobe, the fact that he 
makes no further purchases of this sort does not 



VALUE 55 

prove that he has no further desire for clothing, 
but that he has a stronger desire for something 
else. He follows the line of least sacrifice. So 
the purchase of apples at ten cents each would 
mean to you or me the lack of other things 
which we desire more intensely than we do 
apples. 

So, again, if one is picking and eating wild 
berries, it is certain that somewhere he must 
tire. The first berries are well worth climbing 
ledges for. Finally there comes a berry equally 
large and juicy which is just worth the bother 
of picking. The next berry does not get picked 
at all. Remember for future purposes that the 
last berry picked and the first berry not picked 
are technically called marginal berries. They 
lie on either side the line of choice. The direc- 
tion of least resistance changes at this point 
from picking to not picking. 

32. In a certain fashion all the phenomena 
of exchanges are comprised in the above exam- 
ples. A castaway upon a desert ^ 

"7 . Crusoe could 

island has no one to trade with, and exchange 
yet can essentially trade one thing ^^^^' 
for another, and manifests in his own life a 
complete cycle of economic activities. So far 
as Crusoe's work was rationally planned he was 



56 ELEMENTARY ECONOMICS 

constantly turning liis efforts to that undone 
thing, the doing of which was of leading im- 
portance. At a certain point fishing was aban- 
doned for game ; more fish were refused in the 
interests of more game. The game cost fish or 
the fish bought game, since the work which 
would produce either fish or game was applied 
to game and withdrawn from fish. 

The English economist, Marshall, excellently 
illustrates this principle as follows : — 

" The primitive housewife, finding that she has a 
limited number of hanks of yarn from the year's shear- 
ing, considers all the domestic wants for clothing, and 
tries to distribute the yarn between them in such a way 
as to contribute as much as possible to the family well- 
being. She will think she has failed if, when it is done, 
she has reason to regret that she did not apply more to 
making, say, socks and less to vests. That will mean 
that she has miscalculated the points at which to suspend 
the making of socks and vests respectively ; that she has 
gone too far in the case of vests, and not far enough in 
that of socks, and that, therefore, at the points at which 
she actually did stop, the utility of yarn turned into socks 
was greater than that of yarn turned into vests. But if, 
on the other hand, she hit on the right point to stop at, 
then she made just so many socks and vests that she got 
an equal amount of good of the last bundle of yarn that 
she applied to socks, and the last she applied to vests." 

33. If a man has only one bushel of beans to 
sell he may be able to find some one willing td 



VALUE 57 

pay, if necessary, a very high price for them. 
If there are one hundred bushels to „ , ^ . ^ 

To what point 

be sold, the price will probably have does large sup- 
to be lower, in order that purchasers ^ ^ °^°^ ^"''^ 
may be found for all. Large supplies of product 
must be marketed at low prices, else some share 
cannot be marketed at all. In fact, for the 
entire supply the price will fall as low as the 
price at which any share must be sold. 

It is not always easy to see how this works 
out. At best it can be illustrated only by 
taking artificially simple and, in some measure, 
unusual conditions. We have, for example, to 
assume perfect competition — a condition which 
rarely exists — and a degree of care and accu- 
racy on the part of purchasers which is not 
always found. But the general reasonings of 
the illustration hold, and greatly help to an 
understanding of demand and supply as they 
work in the mass in actual markets. 

Suppose you have one hundred bushels 
of beans. One man desires beans sufficiently 
to be willing to pay a dollar for one bushel. 
If he were going to buy a second bushel, he 
would pay, we will say, only 99 cents therefor, 
98 for a third bushel, and so on. If you are 
a sharp trader, you may make him think that 



58 ELEMENTARY ECONOMICS 

you have only one bushel, and sell him that at 
$1.00. Then if you can convince him that 
you have only one bushel more, you may get 
99 for this, and so on. But evidently if you 
offered to sell him three bushels at $1.00 each, 
he would not take them. That third bushel he 
cares for only to the extent of 98 cents. If you 
offered to sell him as many bushels as he wanted 
at 90 cents a bushel, he would take just eleven 
bushels [1 (100) 2 (99) 3 (98) 4 (97) 5 (96) 
6 (95) 7 (94) 8 (93) 9 (92) 10 (91) 11 (90)]. 
But he would not pay 95 per bushel for the 
whole eleven ; he would rather go without five 
of them — unless, indeed, he had to pay 95 per 
bushel for the whole eleven in order to get 
any (which, in fact, is often the actual case). 
If the price is really a per bushel price for as 
many as he wants, he will buy such a quantity 
as to leave no bushel costing him more than he 
cares for it. Make the price 80 cents per 
bushel, and he will take twenty-one bushels; 
nor will he pay a higher rate per bushel, if he 
has any choice in dividing the quantity — if he 
can throw out any. 

34. And likewise if one hundred bushels are 
offered, not to a single purchaser but upon the 
general market, the price will fall to one cent 



VALUE 59 

each, if, in order to sell all, one bnsliel mnst be 
sold to some one who would rather .j,'^^^^ -g ^ ^^^_ 
go without than pay more than one ^^^ P^^^^- 
cent for it. True, if there were only one seller, 
he might try to trade with the purchasers sepa- 
rately, charging one a dollar, another 99 cents, 
a third 98, etc. Still, if one purchaser knew 
that others were buying at a loAver price, he 
would know that he himself could obtain the 
lower price by holding out. There cannot be 
several prices where buyers and sellers all 
know, in a general way, what is going on, — 
where there is what is called by economists a 
perfect market. 

This is easier to see in the ordinary case of 
a large number of sellers as well as of buyers, 
as, for example, where there are a hundred dif- 
ferent offerers of beans, each with a bushel for 
sale, the buyers remaining as before. The 
prices must be fixed at one cent per bushel, else 
some one willing to sell as low as one cent will 
not be able to make a sale, and will be crying 
his beans about at this price where other people 
are trying to sell at twice or half-a-dozen times 
as much. The price would thereby necessarily 
be brought to his mark. 

Undoubtedly in the case of one producer or 



60 ELEMENT ABY ECONOMICS 

one mercliant or a combination in control of the 

The market ^""^''^^ '^'PP^3^' ^^ ^^^^^^ ^® ^^^^^^^ 

price is the mar- profitable to destroy or keep back 
gma price. ^q-^j^q p^j.^ ^f j^j^q supply rather than 

to accept a price low enough to market it all. 
Cases of this sort are indeed becoming familiar 
in connection with trusts, monopolies, and 
combinations. But where, as is ordinarily the 
case, there are competing buyers and sellers, 
it can rarely be of advantage to any one seller 
to withdraw or destroy his share, or any part of 
it, in order to hold up the market price for all 
sellers. The price therefore falls to the level 
of the weakest, or, as it is called by many 
economists, the final or marginal demand. 

35. We must now allow for differences " in 
the prices which the sellers Avill consent to take. 
The process of ^he wholc process of adjustment 
adjustment. ^j^^^j i,q illustrated as follows : 
Suppose there are offerers of hats disposed to 
sell, if necessary, at prices ranging at unit inter- 
vals from 120 down to 100, what will the price 
be ? One might guess 110. But this must 
depend on the kind of people who want to buy. 
If there are full twenty of them willing to pay 
120 rather than not purchase, the price may 
stand at 120 for all. If there are not over 



VALUE 61 

nineteen of this disposition there must be one 
hat unsold at 120. The price will therefore 
have to be lower. But with lower prices fewer 
hat owners will sell. This is merely to say 
that high prices bring more goods and fewer 
buyers. Now, if we assume that the buyers' 
desires range from 110 to 130, where will the 
price be fixed ? It will not do to take averages. 
If the price were 130 only one man would buy 
and all hat-owners would be eager to sell. At 
125 six men would be disposed to buy and 
twenty to sell ; at 118 two hat-owners would 
refuse to sell, eighteen still consenting. But at 
118 only thirteen men will buy. The price 
must fall nearly to 115, where fifteen men 
will sell. Yet sixteen would buy at this figure. 
At 116, on the other hand, sixteen would sell 
and only fifteen buy. The price must then be 
somewhere between 115 and 116, and the num- 
ber of hats sold fifteen. 

36. This case is typical of all market adjust- 
ments, except where there are combinations or 
some other sort of imperfect compe- 

-Kx ■ 1 1 • '^^^ margins. 

tition. JNotice now that at the point 
of equilibrium between demand and supply — 
the price point — there are sellers upon the point 
of refusing to sell with any fall in price, and 



62 ELEMENT ABY ECONOMICS 

other holders on the point of consenting to sell 
with any rise in price. These men are called the 
marginal seller and the marginal excluded seller; 
Likewise there is a buyer on the point of with- 
drawal if price goes higher, and a possible buyer 
who will appear if price goes lower — the mar- 
ginal buyer and the marginal excluded buyer. 

It is evident from the above illustration that 
many sellers receive a price higher than that 
necessary to induce them to sell ; while at the 
same time many buyers make their purchases 
at a price lower than that which they would 
pay if necessary. Thus in a certain sense 
buyers as well as sellers make profits on the 
market. These profits or differentials are (by 
many economic writers) termed respectively 
buyers' and sellers' quasi-rents. The terms 
are helpful. Fix them and their meanings 
thoroughly in mind. 

The commodity sold to the marginal buyer 
or sold by the marginal seller may be called 
marginal commodities.^ 

1 While the student is required to make himself thoroughly- 
familiar with this doctrine of margins, and with the differential 
quantities called quasi-rents, he is at the same time warned that 
both the doctrines and the terms are of comparatively recent 
appearance in economics, and are not universally accepted 
among economists. In the opinion of the author, however, this 
doctrine of margins is the very heart of economic theory. 



VALUE 63 

37. A few other points require attention. 
We have treated the hats as sold for money. 
We might as well have taken the vake is an as- 
example of cattle sold for wheat, or pect of sacrifice. 
sheep for cows. But sheep and cows do not 
divide readily in trading, and these cases would 
therefore be awkward to handle. But ask your- 
self why the marginal buyer refuses to pay a 
higher price. It is not that because of a higher 
price he would no longer desire the article in 
question, but that at this price he would rather 
buy something else ; in other words, he would 
go without something that he wanted more; he 
would sacrifice more than he obtained. Things 
are not commonly to be had for nothing in this 
world. Whatever has what Ave call market 
value is to be had only on terms of sacrifice; 
something has to be given for it, or done for it, 
in order to get it. Where so much is required 
as to overweigh in importance the thing to be 
got, we refuse to make the sacrifice required. 
Thus we see that in all questions of value things 
have to be compared with other things. To 
take one, no matter which, is to refuse another; 
to enjoy one thing of value is to sacrifice another 
for it. 

38. If useful things were to be had in 



64 ELEMENTARY ECONOMICS 

unlimited quantities and without effort, tliey 
A certain antag- would bear no value. Value comes 
vahie anr'"" ^^^ut Only wliere there is resistance 
utility. to be overcome, — where there is a 

disproportion between desires and the means of 
satisfaction. Value, then, is more nearly the 
measure of the scarcity of useful things than 
of their usefulness. It is not the measure of 
utility, but the measure of the sacrifice involved 
in obtaining utility. The value of any particu- 
lar thing is the measure of its potuer of com- 
manding the sacrifice of other things. And note 
carefully that even for marginal buyers or 
sellers, where the slightest unfavorable change 
in price would prevent the trade, value does 
not stand as the measure of the absolute utility 
of the commodity in question, but only of the 
utility of it relatively to the utility of that 
which it is necessary to forego. 

It is evident, for example, that the poor man 
goes without what the rich man purchases, not 
Value is mar- because the poor man needs the 
&Vr-mIr- ^^i^g less, but because he needs 
ginal sacrifice, something else more. A pound of 
meat may be many times more useful to the 
poor man than to the rich, but to the poor man 
to have the meat means to lack for bread, while 



VALUE 65 

the choice for the rich man lies between bread 
and a cigar or a theatre ticket. So, again, one 
may forego the bread to-day which he would 
have purchased a week or a year ago, though 
no less hungry to-day. The strength of the 
desire for other things is a necessary element 
in the decision. The marginal case is, then, a 
case of marginal relative utility — that is, of 
marginal sacrifice. A given case is marginal 
simply because the utility gained and the 
utility sacrificed are equal. 

39. When one wants a barrel of flour, it may 
be possible to obtain it at the store by working 
a few days for the proprietor, or 

Production is a 

perhaps by exchanging garden truck purchase from 
or eggs for the flour, or by paying ^^^^^> 
the price of the flour in money. But in this 
last case that which is really sacrificed for the 
flour is not the money but the things which the 
money will buy. Again, it would be possible, 
that instead of buying the flour one set to 
work to produce it. In this last case, instead 
of paying money or truck for the flour the 
payment is made with labor or effort. All 
cases of production really trace back finally to 
exactly this case. If one does not produce the 
flour directly, he produces the garden truck or 



6Q ELEMENTARY ECONOMICS 

the eggs, or he earns in some way, through 
labor or service, the wealth or money with 
which to make the purchase. Thus production 
may be helpfully and rightly viewed as a pur- 
chase of utility from nature at the price of 
effort. 

But it is none the less true in any case, that 
each thing of value costs something else, since 
, . , the labor which produced one thing- 

but IS none the . ^ 

less an exchange might have been applied to the pro- 
^^^^' duction of another. And so we re- 

turn again to the fact that all value is attended 
by sacrifice, and that were there no sacrifice 
there would be no value. 

QUESTIONS 

Find the market price in the following problems : 

Boys desh^e base balls according to the following 
scale : 100, 95, 94, 87, 82, 78, 60, 55, 53, 48, 47, 45, 39, 36, 
31, 26. With only 6 base balls in the market, what will 
be the price? With 9? With 12 ? With 15? Let the 
above scale represent the falling intensity of one boy's 
disposition to buy base balls ; will this afEect the results ? 

Sellers' minimum prices are as follows: 36, 35, 33, 31, 
30i, 29|, 28 ; buyers' maximum payments as follows : 40, 
38, 36, 34, 33, 32. Find price. 

Sellers' 19, 18, 17, 14, 12, 7, 6, 5, 4, 3 ; buyers' 1, 2, 3, 4, 
5, 6, 7, 8, 9. Find price. 



CHAPTER VI 

COST OF PRODUCTION 

Suppose yourself to have a pear and a peach ; some 
one tries to take them from you. You can retain one, 
the peach, by letting the other go. What has the peach 
cost you ? 

If one offers you a ride or an evening at the theatre, 
and you choose the ride, what does the ride cost you ? 

If your work will produce for you two bushels of corn 
or one bushel of wheat, and you raise corn, what is the 
cost of production of the corn per bushel ? 

If with a dollar you have decided to buy either a 
book or a jDocket knife, and finally buy the book, what 
does the book cost you ? 

Why do men work ? 

When they stop does this indicate that they want no 
more product ? 

If you were picking berries to eat, when and why 
would you stop picking? 

If you were given one hundred dollars to spend would 
you probably buy one thing or several? 

Would your purchase of a second or third variety of 
goods show that you did not care at all for more of the 
first? AVhy not limit your purchases to one thing? 

40. You have learned in your study of 
Physics that force always follows the line of 
least resistance. Water seeking an outlet 
67 



68 ELEMENTARY ECONOMICS 

breaks through the weakest point in the barrier ; 
the chain gives way at its weakest 

All men act on . , 

lines of least Imk ; when two opposing tendencies 
resistance, n^eet the weaker is overbalanced. 
The line of least resistance includes as well the 
line of the greatest pull ; the stronger attraction 
prevails. So men in choosing between different 
pains or discomforts, refuse the greater, sub- 
mitting to the less ; in choosing between pleas- 
ures they select the greater, following always 
the line of least motive resistance. That is to 
say, the line of human action is the line of least 
sacrifice. Accurately speaking, one cannot act 
contrary to his choice. Men always do the 
thing which they prefer. If the thing done 
were not the preferred thing, another thing 
would be done. The choice may be between 
several evils ; in that case the choice of the least 
is none the less a choice. 

Do not, however, make the mistake of sup- 
posing that men always act selfishly. One has 
but not sel- ^^^^J ^^ remember his home and his 
fisUy. parents to know that this is not 

true. Nor, indeed, is it always true in matters 
of business. The world is full of people who 
refuse to do wrong for gain, as it is of men who, 
in business or outside, do kindnesses for the 



COST OF PRODUCTION 69 

pleasure of doing tliem. In determining the 
line of least sacrifice we have to take account 
of human sympathy and conscience as well as 
of human frailty. Inside ourselves are the 
strongest forces of temptation and of restraint. 
The mother sacrifices health and strength for 
her child, because the greater pain is in the 
other course. 

41. In buying and selling commodities men 
likewise exchange the less desirable for the 
more desirable commodities. When ^]^^^^ sacrifice 
one has money to expend he buys measures value? 
the things he wants most. We commonly say 
that the hat or the suit of clothes costs this or 
that number of dollars. This however is not 
a full or an accurate statement of the case. 
The money is not valuable merely for keeping. 
Had you not bought the hat or the clothes 
you would have bought something else. And 
now note that the thing, which you desire next 
to the thing which you actually buy, shows 
what the thing you buy really costs you. 

Thus if you would pay a dollar for a hat 
you would with still greater readiness pay any 
smaller sum. Your greatest sacrifice shows 
most nearly how highly you prize the hat. 

If you have the opportunity of going to the 



70 ELEMENTARY ECONOMICS 

theatre or to a picnic or for a walk, and prefer 
theatre to picnic and picnic to walk, your love 
of the theatre is better measured by your pic- 
nicking than by your walking inclination — by 
the most you will sacrifice rather than by the 
least. 

If for a bicycle you would give your gun or 
your Irish setter or even your pony, your pony 
best indicates the degree in which you desire a 
bicycle. 

If with your next month's wages you decide 
to buy either a new coat or a tennis set, not 
your month's work but the coat measures what 
the tennis set costs you. 

It has been said that greater love hath no 
man than this, that he should lay down his life 
for his friend ; if so, not the smaller services 
of kindness, but the very love of life itself 
measures man's highest devotion to his fellow. 

42. In attempting to estimate the cost of 
production of commodities, we commonly say 
that such or such a thing cost so many days' 
work, or so much outlay in wages, rent, and 
interest. But just as the money paid out in 
wages,, rent, or interest is unimportant, other- 
wise than for what it would obtain if expended 
differently, so the labor applied to the produc- 



COST OF PRODUCTION 71 

tion of a j)articular commodity is unimportant 
otherwise than as bearing upon what it might 
elsewhere have been made to pro- ,t ^ ^ ^ 

^ Not rent and 

duce. Labor has no vahie in and interest, but 
of itself. Wages are really never cost of produc- 
paid for labor. The value of a *^°^' 
saw or plane depends upon the help it may 
afford to the mechanic. What the field is worth 
depends upon what it will produce — the cow 
upon the milk it will give or the meat it will 
furnish. So the value of labor depends upon 
what can be got out of it. Nobody wants labor 
as such. Mere motion, simple activity, is void 
of value. Only for product and in proportion 
to product can labor command a price. Ulti- 
mately the employer purchases not labor, but 
the goods which labor produces. 

Man produces that he may consume ; labor is 
a process of value creation. He labors because 
this is the condition on which his 

which IS first 

enjoyment of certain goods depends, cause, value or 
Labor is not the cause of the utility 
— the utility is the cause of the labor. So 
utility is the cause of value — the scarcity which 
compels effort being a mere condition. Product 
is the return upon effort. Labor has value merely 
in the sense that the value of the product may 



72 ELEMENTARY ECONOMICS 

be ascribed to the labor which will produce the 
product. It is therefore not logical to measure 
the value of the product by the value of the 
labor ; the labor is measured in value by the 
product. 

43. The value of a thing has been shown to 

be fixed by the sacrifice which it commands 

in exchang-e for other commodities. 

Cost of ^ , . 

production Cost of production is to be stated in 
similar terms. As to any particular 
article, cost of production is the sacrifice of other 
possible values producible by the same produc- 
tive energies. 

Each man seeks for himself that line of pro- 
duction which seems to him to offer the most 
_, . favorable opportunities. Some men 

Wnose cost is ^ ^ 

epal to market could not, or would not, unless at 
a very great change in the selling 
price of their products, change their direction 
of activity. Others, on the other hand, are near 
to the margin of change to another line of pro- 
duction. The market price considerably more 
than remunerates some producers ; it barely 
remunerates others, — that is to say, barely in- 
duces them to continue in their present line of 
production. A producer is often not merely a 
laborer, or an employer of labor; more often. 



COST OF PRODUCTION 73 

indeed almost of necessity, he is an employer 
of capital and land as well. If by a fall in 
market prices the returns become inadequate, 
many producers tend to drop out of this line 
of production, and to seek other lines. As the 
price falls, the producers nearest to changing 
their employment fall out earliest. These men 
are called marginal producers. If wages fall in 
any particular employment wage-earners like- 
wise tend to desert this line of employment. 
On the other hand, when profits or wages in 
any employment tend to increase, increased 
production tends to follow. Fewer goods re- 
sult from a fall in price, more goods from a 
rise. Thus unusual advantages or unusual dis- 
advantages in production tend to be cancelled 
by resulting changes in the supply of goods. 
It thus comes about that the market price of 
each commodity is on the average high enough 
to induce a supply which is ordinarily sufficient 
for the market, and that this average price 
is the same as the marginal cost (sacrifice) of 
production. In this sense it is true, and in 
this sense only, that marginal cost of produc- 
tion fixes market price. The relative strength 
of the demand for other products fixes the 
value of any particular commodity, and fixes 



74 ELEMENTARY ECONOMICS 

as well the amount of it wliicli will be produced. 
For example, if a given amount of wheat will 
exchange for a hat, but can be produced with 
less labor than the hat, wheat production will 
increase or hat production decrease, till this 
advantage in selling is cancelled by a fall in 
the price of wheat relative to hats. 

To make this clearer let us ask why a given 
producer withdraws from production when the 
The cause of price falls. From his point of view 
lioT ittT i^ i« sufficient to say that further 
relative matter, production is a matter of no profit 
or of absolute loss ; but the ultimate answer is 
that his productive powers can be elsewhere 
employed to better advantage. If, working 
elsewhere, he can produce products of more 
value, he changes his occupation, not because 
cost of production is too high absolutely, but 
too high relatively. To continue production 
in the old direction would be to sacrifice a 
greater value possible in another direction. 
The difficulty is not that cost of production 
is too high in the first employment, but that 
for an equal effort a higher remuneration is 
obtainable elsewhere. 

44. The student should now be prepared to 
see that from every change of a producer from 



COST OF PRODUCTION 75 

one line of employment to another two results 
folloAV. The producer makes the 
change in view of a change in mar- 
ket values, but the change in employment tends 
to cause a rise in the value of the commodity 
which he abandons, and a fall in the value of 
the commodity which he sets himself to pro- 
duce. In the beginning his change was the 
result of market conditions ; but that which 
is primarily an effect often becomes in turn 
a cause, and works to counteract the original 
cause. This indeed is almost always the case 
in economic questions. 

The physical sciences excellently illustrate 
social forces in this respect. Water flowing 
from one receptacle to another sets ^ 

^ iDteraction of 

its own limit to the process. Freez- cause and 
ing brings an end to the solidif3dng 
process through a self-manufactured protection 
against the cold. The brisk fire finally smothers 
itself in ashes. A spring hard pushed increases 
its resistance to a new point of equilibrium. 
Chemical reactions themselves bring about new 
equations. Likewise in human affairs: wars 
bring the peace of exhaustion ; satisfaction of 
desire results in satiation ; continued labor 
makes ever shriller the cry for rest. 



76 ELEMENTARY ECONOMICS 

Market values indicate a shifting point of 
adjustment between the opposing forces of 
demand and supply, both, however, taking 
their origin in the primary fact of demand. 



SUGGESTIVE QUESTIONS 

What was the utility to Crusoe of a day's labor ? 

Would the utility have been something else had his 
island been another island ? 

Do you think the value of a man's working powers 
depends upon what it has cost to raise him? 

Why don't you study Hebrew ? Do you think it alto- 
gether useless ? 

What do you expect to do for a living? Why not 
something else ? 

What is the reason that all farmers in your neighbor- 
hood do not raise rye exclusively? 

Why not produce silk in the United States ? 

Does the marginal producer's or seller's sacrifice fix 
price? Or is it the marginal purchaser's sacrifice? Or 
is it the equation of demand and supply ? Which is the 
primary force ? 

Why does the nearest excluded buyer not buy? I^ear- 
est excluded seller not sell? 

AVhy do some producers stop producing when price 
falls? 

What do they do then ? 

Why do others continue to produce? 

Do producers expect to determine price by their sac- 
rifice ? 

Would it be well for most of them if they could ? Or 



COST OF PRODUCTION 77 

do they adapt production to price? How does your 
answer apply to monopoly producers? 

Are wages fixed by demand and supply, or by produc- 
tiveness of labor, or by both? How may you reconcile 
affirmative answers ? 



CHAPTER VII 

KENT OF LAND 

If you were renting land for farming would you pay ' 
more for some lands than you would for others ? Why ? 

How much do you think you could handle advantage- 
ously without hiring men ? 

Why not get along with half as much ? One fourth 
as much ? Twice as much ? Four times ? 

From 320 acres do you think two men in diversified 
farming could get twice as much as one ? Four twice 
as much as two? Eight as four? Sixteen as eight? 
Where would this stop, if ever? 

Would it matter for this purpose whether the crop 
were strawberries or wheat ? 

Would the advantages of increase of numbers ever 
cease in the case of strawberries ? 

Can two men harvest more hay or wheat than one? 
Two times as much ? Three times as much ? 

If you were renting land for building would you pay 
more for one town lot than for another ? Why ? 

45. The producer, estimating as best he may 
the price which he will be able to obtain for 
The market bis proclucts, lias before him the 
value of the problem of how to produce most 

crop IS the -■- ^ 

primary fact, cheaply the products in question. 
Suppose, for example, that he undertakes the 

78 



RENT OF LAND 79 

production of wheat. He will need land, capi- 
tal, and laborers. But is it best to till much 
land, or shall he take less land and employ 
more laborers, or shall he rather increase the 
amount of machinery and fertilizers used ? 
The selling price of his product fixes the out- 
side limit of his expenditures. Out of this sell- 
ing price he must get back the interest, rent, 
and wages, and derive whatever is to remain 
to him as the remuneration for his superin- 
tendence, risk, and effort. He finds the rate 
of wage payment practically fixed, for example, 
at 11.50 per day. He will increase his number 
of men as long as he believes that his product 
will thereby increase so as to justify the larger 
outlay. His demand for labor is evidently 
a demand for the results of labor — for the 
commodities which it produces. His demand 
for labor must then find its limit at the point 
where the wage payments approach equality 
with the increase in the value of the product 
due to the laborer. We come, therefore, to 
the general proposition that wages are at the 
maximum limited by the value of the laborer's 
own contribution to the value of the prod- 
uct. We shall later see that, through the op- 
portunity open to laborers of producing upon 



80 ELEMENTARY ECONOMICS 

their own account, and through the competi- 
tion of employers seeking profit from the ser- 
vices of employees, the actual wage payment 
commonly does not fall very far short of this 
maximum. 

Our wheat producer finds also that capital 
is worth a certain per cent per year ; that is, 
he finds an established rate of interest. How 
much capital he shall employ must depend 
upon the amount of it which he can advan- 
tageously apply, while retaining for himself a 
balance of profit over the cost of production. 

46. But with wages and interest and market 
prices as tliey are or are expected to be, he 
Lands differ discovers great differences in the de- 
greatiy. sirability of different lands. One 

piece but scantily remunerates the application 
of labor and capital, producing, we will say, 
ten bushels of wheat to the acre. Under con- 
ditions of cost and price as they exist, this 
land is therefore barely worth changing from 
pasture to tillage, and is barely worth hiring 
at a rental sufficient to induce the change. 
Lands which, with the same expenditure of 
capital and labor will produce more bushels 
per acre, command a proportionately high 
rental — approximately the value of these 



BENT OF LAND 81 

extra bushels. Just as men pay different 

prices for different qualities of machines, 

tools, horses, or pianos, they rent or purchase 

different pieces of land at different rental or 

purchase prices. 

47. So far then there is nothing peculiar or 

striking in land or rental questions. But if 

we turn to consider the effect upon 

. -^ Effect of in- 

rent from increasing population, or crease in popu- 

from increasing demand for agri- 
cultural products, we shall find that some im- 
portant tendencies become manifest, which are 
peculiar to questions of land and rent. 

These tendencies are all explained by the 
fact that the effectiveness of labor in agricult- 
ure suffers severely if the supply of land is 
inadequate. How much land one man may 
advantageously work depends, of course, upon 
what crop he is going to raise. But one cannot 
ordinarily raise as much from five acres as from 
ten, nor can one ordinarily, by doubling the 
labor and capital on his ten acres, thereby 
double the product. Were it possible continu- 
ally to double product by doubling the expenses 
of cultivation, there could never come any need 
of more cultivated land, no matter what increase 
might take place in the demand for agricultural 



82 ELEMENTARY ECONOMICS 

product. As it is, however, a larger demand 
for product is met in part by cultivating more 
land. 

Evidently, if population were sufficiently 
sparse, only the best land would need to be 
cultivated, and were land of the best quality 
unlimited in supply, no rent would have to be 
paid by any one, since if rent were demanded 
the cultivator would have his choice of other 
land equally good. But as population should 
increase, lands of inferior quality or lands at in- 
convenient distances would have to be brought 
under cultivation, and rent would then be 
paid for the land of better quality. So when 
third-quality land was brought into use, the 
second-quality land would command a rental 
and the first-quality a still higher rental. 

48. Note now that this application of labor 
and capital to poorer and poorer lands must 
There come a involve a constant tendency toward 
Senrand *^^^ lowering of wages and interest, 
higher rents. siucc there is necessitated a con- 
stantly decreasing product in proportion to 
the labor and capital applied. True, there 
is an increase in product, but there is not an 
increase proportional to the increase in the num- 
ber of claims against it. But all the while as 



BENT OF LAND 83 

poorer lands are brought into cultivation there 
results a larger volume of rent receipts ; that 
is to say, an increasing share of the product 
goes to the landlords as payment for the oppor- 
tunity to cultivate the land. 

In view both of the difficulty and of the im- 
portance of this principle, further explanation 
seems desirable. It is clear that The results are 
wages must somewhat fall, since the |^^°^arffinai 
total harvest — the dividend — di- doctrine, 
vided by the number of cultivators, gives a 
lower quotient — a lower per capita of product. 
But it is also true that this lower aggregate 
product and lower individual share of the quo- 
tient does not measure all the fall. We have 
seen that to sell one hundred apples the price 
must go low enough to take the last one, the 
marginal purchaser marking the price level for 
all other purchasers. So when men are being 
hired, no one of them will be paid more than 
would be lost in product if he did not work. 
Thus each advance of cultivation to poorer 
soils lowers wages all along the line. The 
laborer can receive as wages only what he 
adds to product. Therefore what is paid for 
labor in the most unfavorable of the oppor- 
tunities used, limits the wage payment for 



84 ELEMENTARY ECONOMICS 

labor of similar quality and effectiveness else- 
where employed. 

In a similar manner less and less productive 
opportunities in the employment of increasing 
capital tend to reduce the interest paid upon 
capital used in any employment. 

In the case of the apples, it was not the aver- 
age demand but the marginal demand which 
explained the price of apples. In the case 
of land, it is not the productiveness of the best 
land or of average land, but of the poorest 
land in cultivation, which gives the rate of 
payment for the productive energies — labor 
and capital — applied thereto. Thus the very 
causes which serve to increase rent work at the 
same time to lower wages and interest. 

49. This tendency of agriculture toward 
diminishing product relative to increased labor 
and capital applied, is easy enough to under- 
stand, if we think of farming or gardening as 
any one of us mav see it round about 

The law of '^ 

diminisMng him. You Cannot double the product 
re urns. ^^ your garden indefinitely by doub- 

ling the care and fertilizers. If a farmer has 
a farm of reasonable size, he will not get ten 
times the grass or wheat from it by multiply- 
ing by ten the number of hired men. This 



BENT OF LAND 85 

tendency toward lower returns in agriculture 
is called in Political Economy tlie law of 
diminishing returns. By this law is in part 
to be explained the fact, that in densely popu- 
lated countries, like China and Japan, wages 
are low and the standard of living depressed. 
When average production is small, average 
consumption — that is to say, the average 
reward of effort, wages — must be correspond- 
ingly small. Where low average productive- 
ness results from insufficient land, it comes 
about that the better lands bear high rents and 
command high prices; that is to say, a large 
share of the product goes to landowners in the 
form of rent or of interest on landed invest- 
ments. Bad environment brings small pros- 
perity. The newer countries, like America 
and Australia, have the advantage in this re- 
spect over old and thickly populated lands, like 
those of Europe. Where the land is adequate, 
the rents are low. 

QUESTIONS 

Compare the Chinese and the English in point of 
(a) intelligence, (5) strength, (c) activity, (d) progres- 
siveness, (e) scientific knowledge, (/) inventiveness, 
(g) freedom, (h) hopefulness, (i) ambition. 



86 ELEMENTARY ECONOMICS 

Compare the respective environments in (a) climate, 
(b) mineral resom^ces, (c) fertility, (d) adequate supply 
of land. 

URBAN LANDS 

50. Accessibility to market is also a matter 
of very great importance in fixing the value of 
Travel or pay 1^^^' ^^'^r example, you might be 
money. willing to pay a good sum for the 

privilege of drawing water from a spring near 
by your own home, rather than obtain the water 
gratis from a distant spring. In the case of 
the second spring your walk is a sort of rent 
— you pay in effort instead of in money. 

The matter of location becomes of over- 
shadowing importance in the case of city rents, 
where convenience, health, beauty, and social 
advantages are the leading subjects of interest. 
As with agricultural lands, so with urban lands 
there are locations of vanishing value which 
are nearly marginal and therefore almost non- 
rent-paying. The better locations command 
rent in the measure that they are more de- 
sirable than the marginal locations. Rent is 
therefore the measure of the difference in de- 
sirability between better lands and marginal 
lands. The word differential is a common 
and useful term in describing any form of 



URBAN LANDS 87 

rent — whether land rent or the different quasi- 
rents. 

SUGGESTIVE QUESTIONS 

Assume an island with lands ranging in productive 
quality from 28 to 20 as shown by the diagram. Consider 
that with each 100 of population a 
new tract has to be cultivated and 20 20 20 20 20 20 
that the diagram covers all the land 21 21 21 21 21 21 
to vvhich the society has access. 99 99 99 99 99 99 
What will be the sum total of rent Z. ^ Z Z 9^ o^ 
with a popidation of 900? 1,300? " "* " " 

1,800? 2,300? 2,500? 2,900? 25 26 26 26 26 26 

Assume also that the fertile lands 27 27 27 28 28 28 
are nearer the market, and that each 

grade of more distant land must pay one bushel as trans- 
portation charge to reach the market. How are your 
foregoing answers modified? 

Assume again that it is the poorer lands which are 
nearest the market, the better lands being subject to trans- 
portation charges. Revise your answers to fit this case. 

What effect, other things being equal, does population 
have on aggregate rents ? 

Suppose the State owned the land, should we pay any 
rent? 

Do we now in any way pay what amounts to a land 
rent to the State ? 

What does a perpetual lease without rent amount to ? 

If you were a tenant, and the landlord remitted your 
rent, would you have to, or would you, sell your products 
at lower prices ? 

Suppose all land rent were released ; how would this 
affect prices? 

What effect would the general forgiving of rents have 



88 ELEMENTARY ECONOMICS 

on the demand for products ? On the supply of products ? 
On amount of land cultivated ? On prices ? 

What effect from a percentage tax on rents ? 

Would it force any land out of cultivation? 

If tenants were required to pay more rent what would 
they do ? If consumers were charged higher prices what 
would they do ? 

On whom then would the tax fall ? 

If a large body of fertile land — a new continent for 
example — were discovered, what effect would it have on 
rents in Europe? 

Rents and land values, rural, have largely fallen in 
Europe. Why? 

What would be the tendency of rents on the new con- 
tinent ? 

What effect on supply of products ? 

On margin of utility of land ? 

On social dividend ? On average comfort ? 

If the land of the world were all owned by one man 
or company, could rents be raised profitably for the 
owner ? 

Is there any reason why landowners cannot combine ? 

Would some land be thrown out of use? Why? 

Who would lose the rent on this ? 

If a large amount of land were taken from agriculture 
for parks, etc., what effect would this have on the aggre- 
gate of rents ? On prices of products ? 

Is it the increase of rent or the decrease of supply 
which causes prices to advance ? 

What will the tenants do if prices fall? 

Will all tenants do this? 

Which ones ? 

If you were a farmer with a large farm, would you 
hire men to work for you? Why? How many? 

When and where would you stop ? 



URBAN LANDS 89 

Could you fix prices of products ? Wages of employees ? 
Rents ? 

What bearing has productivity of marginal land on 
agricultural wages ? 

What bearing have wages in other employments on 
agricultural wages ? 

An increased demand for agricultural produce exer- 
cises what effect on the margin of utility of land ? On 
rents ? On prices V On agricultural wages ? On wages 
generally ? 

Is the wages question the solution of the fraction 
social dividend over socicd divisor ? 

Interpret the following : 

social dividend — rent — interest 

wages = 

wage-earners 

What would you do with taxes in this formula? 

What makes a town lot valuable ? 

Who made it valuable ? 

Who gets the advantage ? 

What do you mean by the unearned increment? 

In what sense are the interests of landowners opposed 
to the interests of all other classes of society ? 

Read in the encyclopedia articles on Malthus and Mal- 
thusianism. 

Prove that rent does not commonly add to price. 

In justice ought the tenant to pay rent upon the im- 
provements which he himself has made upon the land ? 

How may he be compelled under free competition 
(rack rent) to do this. 

What effect on the condition of farmers? 

What effects upon the habits of husbandry ? 

What relation do you perceive to the history of Ire- 
land? 

What effect on rents from improved machinery? 



90 ELEMENTAEY ECONOMICS 

What effect on rents from improved methods and 
science in cultivation? 

What effect on rents from improved transportation ? 

What effect on social dividend from improved ma- 
chinery? 

What effect on social dividend from improved methods 
and science ? 

What effect on social dividend from improved trans- 
portation ? 

RENT AND PRICES 

When and why is there an increase in the amount of 
cultivated land ? An abandonment ? 

When prices rise for products is this a cause of higher 
rent or a result ? 

If increased quantities of cloth are made and marketed 
will the price per yard rise or fall ? Why ? 

What effect from higher prices on amount produced? 
Will these higher prices last? 

What effect from higher prices on agricultural prod- 
ucts ? Will these higher prices last ? 

Is the supply of land equally as flexible as that of cloth ? 

On what terms in point of cost can agricultural prod- 
ucts be increased. 

When will poor land find occupiers? Why? 

What effect on the rental value of better land ? 

51. We now approach a more difficult prob- 
lem. Evidently as poorer lands have to be 
cultivated the prices of agricultural products 
will tend to rise. Shall we say that the rise 
in prices results from the cultivation of the 



BENT AND PRICES 91 

poorer land, or that cultivation results from 
the rise in prices? 

The student will do well to stop here and 
think this out for himself. 

Clearly enough the necessity of cultivat- 
ing poorer lands explains the rise in prices. 
But no individual cultivator would ^ 
enter upon this poorer land other- prices, or prices 

jtp-n + g v 

wise than as induced so to do by 
the higher prices. Producers accejDt the offer 
held out to them by market values. Increas- 
ing demand for agricultural products is the 
primary force which makes these higher mar- 
ket prices possible. Increasing resistance from 
nature, that is to say, a higher necessary sacri- 
fice in production, is ±he fact which, added to 
the demand, makes these higher prices neces- 
sary. When you push hard upon a sjDring, the 
resistance of the spring is the result and the 
counterpart of the force with which you press 
it. When snow packs hard before the ]3lough 
of the locomotive, it is in reality the snow which 
is getting packed by the force directed against 
it. In all cases where action and reaction meet 
in equilibrium, it is the action and not the reac- 
tion which is the primary force. And so with 
the cultivation of poorer land and the attendant 



92 ELEMENTARY ECONOMICS 

rise in prices. Increasing difficulty is the oc- 
casion of tlie rise in prices — the condition — 
while increasing demand is the cause. Thus 
we again face the fact that utility alone — 
demand — does not explain value. Value is 
the measure of the resistance — the sacrifice at- 
tendant upon obtaining the utility and satisfy- 
ing the demand. Value increases as goods move 
farther and farther from the condition of pure 
bounties of nature. 

52. The land which is just upon the point 
of not being cultivated if prices fall, or Avhich 
Margin of cuiti- would uot be Cultivated if a rent 
i::rX^i higher than the value of the land 
explains rent, for pasture or forestry were im- 
posed, is called land at the margin of cultiva- 
tion. Cost of production on this marginal 
land and the market value of the product 
are equal. The cultivation of this land is a 
result of market value, and cost and value on 
this land are commensurate, just as, in the bean 
or hat illustration, price was the outcome of 
demand, and the marginal demand was found 
to be the equivalent of price. 

We say truly that value is always the re- 
sultant of demand and supply, the point at 
which they are in equilibrium, — but it is still 



BENT AND PRICES 93 

to be remembered that supply comes about as 
the result of demand. Price is high because 
resistance is high. Where resistance would be 
greater than the price, production will not take 
place. 

53. Now note that grain produced on land 
better than the marginal land could be pro- 
duced profitably if prices were lower, on better land 
A surplus remains after the outlays ^i:^^:,^;: 
of production are covered. Who rent is paid, 
gets the benefit of this surplus ? It is due to 
the superior quality of the land. If the culti- 
vator is a renter, he must turn it over to the 
landlord. Otherwise the landlord will rent 
to some one else. At any rental payment less 
than this advantage, cultivators of marginal 
land would be eager for this better land. This 
surplus in the market value of the product of 
the better land over the outlays of labor and 
capital in its production, is the fund from 
which rent is paid. Rent, therefore, like wages 
or interest, is drawn from the selling price of 
the product. 

It thus appears that rents are the result of 
market prices and not the cause of them. The 
rents paid in excess of marginal rent clearly 
cannot affect market prices. They are merely 



94 ELEMENT ABY ECONOMICS 

a question between landlord and tenant as 
to liow much each shall get out of the 
Eents do not market value of the product. As 
affect prices. long as poor land must be culti- 
vated to supply the demand, so long prices 
must be high enough to compensate the pro- 
duction on this poor land. To cancel the rent 
on the better land would affect neither the 
market supply of products nor the demand; 
it would merely transfer to the tenant the 
advantages which must attach to superior 
land. Increasing demand pushes cultivation 
upon poor soil, where the resistance to pro- 
duction is greater. Eent, therefore, is the 
outcome of increasing resistance to produc- 
tion. Were there no necessity for cultivating 
poorer land, that is to say, were there no in- 
crease in resistance, there could be no increase 
in rent. But this is not to say that low 
rents bring low prices and high rents high 
prices, but merely that the conditions of de- 
mand and supply which bring low prices bring 
low rents, and that conditions which bring high 
prices bring high rents. 



CHAPTER VIII 

INTEREST 

What different motives might one have for laying 
aside money ? 

Do people commonly get interest on money deposited 
in national banks? 

Would you ever pay for having your travelling bag 
guarded ? Why ? 

Why not pay the banker for keeping your money? 

If charges for keeping money were common would any 
saving still take place ? 



What different motives might one have for borrowing 
money ? 

If for use in farming what would determine the rate 
which one could pay ? 

Could a starving man afford to borrow at 100 per cent 
per annum? 

Is bread alwaj^s of the same utility to the consumer ? 

Does the borrower get an advantage from borrowing ? 
How? 

The lender from lending ? How ? 

What effect upon the social dividend from fertilizers? 

What effect from improved methods of transportation ? 
From opening up of new supplies of land ? 

What effect from better farm machinery? Better 
skill in working land ? 

95 



96 ELEMENTARY ECONOMICS 

What effect from more effective machinery in the 
factory ? 

Does the laborer work for his own benefit or for some- 
one's else ? 

Who consumes his wages ? 

How is it with machines ? 

Is machinery humanity's assistant or its competitor? 

Does machinery sometimes turn laborers out of employ- 
ment ? How ? 

Who make the machines? 

What effect from machinery upon the purchasing 
power of other men's wages? 

Would wages be higher if we had to use gas for light 
instead of sunshine ? 

If products can be produced at small effort will labor- 
ers be well or ill rewarded in products ? 

Is machinery the laborer's assistant or his competitor? 

54. If one has to-day a great appetite and no 
dinner, and will later have at his disposal two 
Advantages of dinners with no increase of appetite, 
borrowing. borrowing must be greatly to his 
advantage, and if necessary he may pay enor- 
mous interest rates without exhausting this ad- 
vantage. Neither money nor wealth is of stable 
utility to men, but varies in utility relatively 
to their needs. So the young man rationally 
borrows the money to complete his education, 
counting upon paying at a more convenient 
time. So a business man, in straits for means 
to save his credit from injury or his property 



INTEREST 97 

from forced sale, pays with advantage for the 
right to await a better market or for time to 
muster his resources. 

These cases are typical of the rational demand 
for loan funds. The demand for capital to be 
used in aid of production is also a familiar 
matter. There is, as well, an improvident de- 
mand — the spendthrift near-sightedness which 
burdens a needy future in favor of a luxurious 
and wasteful present. 

55. But for the most part the demand for 
loans rests upon the fact that production can be 
increased through the help of capital. 

A farmer, for example, finds that with the 
expenditure of flOOO in ditching, he can in- 
crease by $200 the annual productiveness of his 
meadow. If necessary, then, he can afford to 
pay nearl}^ 20% for borrowed money with which 
to effect this improvement. If the market rate 
of interest is 6 % , he can profitably borrow more 
than this flOOO. Suppose the gain in produc- 
tiveness from added supplies of capital to be as 
follows: — 

Second |1,000 . . $150 Fifth $1,000 . . $70 
Third 1,000 . . 120 Sixth 1,000 . . 60 
Fourth 1,000 . . 90 Seventh 1,000 . . 50 

With the rate of interest at 6 9^ he can afford 



98 ELEMENTARY ECONOMICS 

to borrow at least $4000 additional. To borrow 
yet a full flOOO more would profit him only as 
much as the necessary interest payment. He 
will therefore borrow say $750, at an increase 
in productiveness of say 150. The account 
then stands as follows : — 

11,000 at $60 interest and $200 advantage. 



1,000 at 


60 interest and 


150 advantage. 


1,000 at 


60 interest and 


120 advantage. 


1,000 at 


60 interest and 


90 advantage. 


1,000 at 


60 interest and 


70 advantage. 


750 at 


45 interest and 


50 advantage. 



5,750 345 680 

Note that his demand for capital at an estab- 
lished rate finds its limit at the point where 
usefulness falls to a level with interest pay- 
ment. Were some more effective method of 
ditching discovered, it would be advantageous 
to increase his borrowings. 

Note also, that the limit of his demand is not 
at all affected by the amount which his pre- 
ceding borrowings have already profited him. 
Each addition of capital stands on its own 
merits as a separate question. 

The manufacturer, likewise, may find it of 
great profit to increase the volume of his busi- 



INTEREST 99 

ness, or to improve his processes of production. 
He also stops at the point of disappearing ad- 
vantage in view of the rates of interest which 
he is compelled to pay. 

bQ. It is evident in all these cases that some- 
thing is borrowed on terms of a larger repay- 
ment later. That is what interest 

The value of 

means. ^ This increased payment m- time with 
dicates merely that for one reason ^^^^ ^ ' 
or another men prefer to have a thing now 
rather than a year from now. We can make 
use of it during the year. The earlier we get 
it and the longer we have it, the more benefit 
we obtain from it. This is really why a note 
payable in the future is subject to a discount. 
The future dollar, or machine, or farm sells at 
a disadvantage as against the present. If we 
had the thing now we could be using it — add- 
ing to it — making it a percentage larger at 
the end of the term. So putting it the other 
way, we say that the present thing is at a pre- 
mium over the future thing. 

57. Some part of the explanation of interest 
is doubtless to be found in human shortsight- 

1 Keep in mind that we are discussing pure interest, net in- 
terest, and not tliis or tliat rate imposed or paid as a kind of 
insurance charge against risli of loss of the principal. See note 
to Section 26. 



100 ELEMENTARY ECONOMICS 

edness and stupidity. Just as the object which 
is near by appears to the eye larger than the 
Irrational distant object, SO in the mind's eye 
interest. ^he pleasure, or pain, or burden of 

a year hence fails to impress us at its real im- 
portance. We consume or Avaste to-day, not 
realizing the want in the future, or the burden 
of payment or of replacement. At the year's 
end, likewise, the pleasure of to-day will look 
insignificant, when placed by the side of the 
needs and burdens of that time. Clear-headed 
and far-sighted men do not make this mistake 
to the same extent as the stupid people and the 
spendthrift ; but almost all of us make it in 
some measure ; most of us are prone to get into 
unnecessary debt. It is characteristic of sav- 
ages to make small provision for the future or 
no provision at all. 

58. What then shall we take as a definition 
of interest? Is it a payment for the use of 

Is interest a money, Or, as it is sometimes ex- 
rent on money? pressed, a rent on money? Not 
accurately, since what Ave commonly borrow is 
really the things which money will exchange 
for. This notion of interest as payment for 
the use of money, is what is in the minds 
of those people who believe that interest is 



INTEREST 101 

morally wrong. Can ducats breed ? Keep 
your gold pieces never so long, Avill tliey mul- 
tiply ? If they will not increase in your hands, 
why receive an increase from the hands of the 
debtor who has borrowed them ? True enough 
— but the sheep, which the money buys, breed ; 
cows pay interest in the guise of milk and 
butter, and the farmer cuts coupons of grass 
and grain from his fields, with which to redeem 
the interest coupons on his mortgage note. 

Why not then say that interest is pajmient 
for the use of capital ? But as we have seen, 
not all wealth is capital. Only that 

T . T .,,.,. Is it paid for 

share is termed capital which is used the use of 
as an aid in the further production ^^^^ ^ ' 
of wealth. Interest, however, is paid on any 
sort of wealth. As the famous Frenchman 
Turgot wrote : " Men borrow with all sorts of 
views and from all sorts of motives. This one 
borrows to embark upon an enterprise which 
shall make his fortune ; that to buy a tract of 
land ; another to pay a gambling debt ; still 
another to cover a loss of revenue due to acci- 
dent; yet another to live until he nyiy earn 
something by his labor. But all of these mo- 
tives that influence the borrower are alto- 
gether indifferent to the lender. This latter 



102 ELEMENTARY ECONOMICS 

is concerned "but with two things, the interest 
which he shall receive and the safety of his 
capital. He takes no more thought of the use 
to which the borrower will put it than does the 
merchant of the use which a buyer will make 
of the food supplies which he buys." 

Interest is often defined as payment for the use 
of wealth. For most purposes this is all that 
or for the use of could be wished. But it does not 
wealth? apply quite accurately where goods 

are borrowed and are consumed instead of 
being used and returned. If we speak in this 
case of payment for the use of wealth, we must 
have in mind a use which the borrower might 
have made, but did not make. 

59. We therefore adopt as our final state- 
ment a definition which, in the absence of all 
The accurate ^^^^ explanation and illustration, 
definition. probably would not mean much : 

Intey^est is a difference in value in favor of pres- 
ent over future goods. This difference results 
in part from the habit of underestimating the 
needs of the future and of burdening the future 
in aid ^ of the present; in part from the fact 
that with the help of capital an increase in 
product is possible. That is to say, the de- 
mand for present goods on terms of a larger 



INTEREST 103 

payment in the future, is clue in part to the 
helpfuhiess of wealth in productive processes, 
— in part to a desire for wealth for purposes 
which are non-productive. This demand for 
unproductive uses depends in part upon the call 
for money to pay existing debts, in part upon 
the disposition of men to discount the future, 
in part, also, upon the fact that in some cases a 
larger service is afforded by immediate consump- 
tion of a given sum of values than will be sacri- 
ficed by the later payment of a greater sum. 

60. To say that the rate of interest is six 
per cent per annum really means that 100 of 
wealth can be sold to-day as^ainst 

•^ ^ How is the 

106 at a year from to-day ; men interest rate 
pay a premium for the present 
thing. At what rate of premium present 
goods can be sold against future goods, is a 
question of adjustment between demand and 
supply. The process of adjustment is exactly 
like the cases, already analyzed, of selling hats 
or apples. The rate of premium must be low 
enough so that supply and demand may be in 
equilibrium. The helpfulness of wealth as an 
aid in production occasions the larger share of 
the borrowing demand. When the opportuni- 
ties for employing capital are limited, or the 



104 ELEMENTARY ECONOMICS 

increase in product from the use of capital is 
small, the rate of interest must be low. 

The rate of interest is, then, commensurate 
with the marginal desirability of wealth — 
speaking roughly, with the marginal produc- 
tivity of capital. All borrowers, however, ex- 
pect to make something more, and many of 
them very much more, from the use of capital 
than they pay as interest. Many of them in 
fact do obtain this surplus, that is to say, 
interest payments to lenders fall a long way 
inside the usefulness of capital. If lender and 
borrower, then, are benefited by the existence 
of capital and the loaning of it, it is left to in- 
quire whether any one is injured. 

61. We have seen that with wages and in- 
terest to be paid, the producer of commodities 
. , , has the question before him whether 

Are capital and _ ^ 

laborers com- to hire morc men or to employ more 
^^ ^ °^^ capital. Shall he purchase labor- 

saving machinery? Or shall he do his work by 
hand labor? The factory owner is constantly 
replacing employees by machinery. Type- 
setting machines are displacing the printers. 
Air-brakes take the place of brakemen. In 
a certain sense, then, capital is the competitor 
of the laborer ; which will do the work the 



INTEREST 105 

cheaper decides which shall get the job. Yet 
somehow we feel certain that labor-saving appli- 
ances make for the general well-being, that the 
riots of English and French workmen against 
the spinning- jenny and the power-loom were ig- 
norant mistakes. In trnth, the hostility of wage- 
earners toward inventions is an error which is 
fast fading from the world. All these new pro- 
cesses and inventions are methods of increasing 
the social dividend. They are savers and mul- 
tipliers of human energies in production. 

62. But suppose the wage-earner to answer, 
"This may be true, but we don't get the in- 
crease. It is caused by capital ; it goes to the 
owner of the capital ; and we are driven from 
our places to starve while the machines do 
the work." Is this a fallacy? And how shall 
we prove it a fallacy? 

A full demonstration of it must await the 
discussion of Profits and Wages in the next 
chapter. But it is well in this connection to 
recall again the origin of capital, r^j^g question 
It is merely stored-up labor. Labor "g^% pl^^^^d. 
is employed in creating it, and it continually 
wears itself out and must be replaced by labor. 
This is illustrated in the constant wear and tear 
of machinery, in the consinnption of coal, and 



106 ELEMENTARY ECONOMICS 

in the repair of factories, buildings, cars, and 
ships. And not only does it require wage- 
earners to make and repair the machinery, but 
to oversee and operate it. Capital is a round- 
about application of labor to production. It 
would be odd if in the resulting increase of 
product the stored-up labor should get all or 
most of the advantage. Nor does it so in fact, 
though Ave have as yet seen no reason to assert 
that the laborer gets the advantage. It must, 
however, be true that as capital increases, inter- 
est, which measures the marginal desirability 
of capital, must fall ; the borrower obtains the 
services of capital more cheaply. The advan- 
tage must then fall to either the laborer or his 
employer. The case is, therefore, not one of 
laborer against lender, but rather of laborer 
against employer, — against the user rather 
than against the owner. Are the benefits of 
increased capital really somehow intercepted by 
the employer or by some one else, so that they 
fall short of reaching the Avage-earner ? 

Doubtless it often happens that by falling 
prices the market is so much Avidened that the 
number of wage-earners is really increased, 
Avithout reference to those employed in making 
machines. This is ordinarily the case Avhen a 



INTEREST 107 

small fall in prices brings about a more than 
proportionate increase in consump- „ , . 

^ ^ _ ^ Macnines some- 

tion, as, for example, in the case of times displace 
books; but this is as clearly often 
not true, as, for example, where agricultural ma- 
chinery displaces hand labor ; no great increase 
in food products can be marketed. Evidently, 
if machines did not economize labor they would 
not be used. An increase of product must result 
from a given sum of expenditure. But whether 
machines in any particular industry do or do not 
take the place of labor, it will be made clear in 
the next chapter that the wage-earner, in the out- 
come, gets most of the benefits from the econ- 
omy of effort made possible through machinery. 

SUGGESTIVE QUESTIONS 

In what case does a physician treat his horses as 
capital? In what case as mere consumption goods? 

Would an increased supply of money affect the crop 
from any piece of land? The butter from any cow? 
The ratio between the yearly output — dividend — and 
the market value of any property ? 

Assuming that doubling the currency w^ould double 
the price of cows, sheep, and farms, would it do the same 
thing for calves, lambs, and harvests ? 

What effect, then, on interest rates ? 

In what sense is interest a ratio ? 

What forces determine this ratio? Which is ultimate? 



CHAPTER IX 

WAGES AND DISTRIBUTION 

Are machines productive ? In what sense ? 

Are they productive alone? What must go with 
them? 

How were they produced ? 

Is there any relation between high standards of living 
and high efficiency ? 

Does our higher standard of living make our wages 
higher than European wages ? 

What does make our wages higher ? 

Has the fertility of our soil anything to do with it ? 

What limits the employer's disposition (ability) to 
pay wages? 

Can the farmer increase the crop by being hungry? 
If so, in what sense? 

Can he increase his ability to pay wages by the fact 
that his hired man has a large family ? 

Can the hired man use this fact to increase his wages? 

Do wages equal wants or wants wages? Which is 
the nearer the truth ? 

Are women's wages lower than men's because they can 
afford to work for less ? 

Why does not the employer have to pay them more ? 
Why may he not pay tliem still less ? 

Do employers make more by hiring women than men ? 

If the population of the world should double, what 
108 



WAGES AND BISTBIBUTION 109 

effect on the aggregate production of commodities ? 
Would the per capita production maintain itself? 
Why? Discuss the effect (1) on agricultural production, 
(2) on other production. 

63. It cannot be too firmly held in mind tliat 
in any investigation of economic facts we are 
studying mankind in its relations 
to its environment. Man is the Son qnt^-'"' 

actor and the central fact. Neither *i°^s of corre- 
spondence. 
land nor capital serves for produc- 
tive purposes, except as subordinate to man 
and directed by him. Neither is productively 
independent. The economic point of view 
conceives of man as the actor, and of all other 
things as raAV material at his hands. All pro- 
duction takes place for his benefit, in response 
to his demand, and goes to his benefit. Rent 
is not paid to land, but to landowners, interest 
not to capital, but to capital owners. The 
national dividend is distributed among the 
members of the producing society for consump- 
tion by them, and not by land, or machines, or 
wealth. True, the advantages do, in some 
measure, go to particular members of society 
by virtue of their possession of land or capital, 
but it is none the less true that consumption 
depends upon production, and that average 



110 ELEMENTARY ECONOMICS 

consumption is the equivalent and outcome of 
average production. 

64. The question of wages is too often 
treated as if what the wage-earners receive 

Wagesaques- ^^^^^^ ^^^^ ^y what they need to 
tion of product, Kye upon, instead of by what they 

audnotof J J 

standards of are able to produce. It is con- 
^^^^' stantly asserted that wages are gov- 

erned by the standard of living. That people 
live well is put forward as a reason that they 
are well paid — as explanation for the fact that 
they are able to live well. But in truth high 
living has little to do with the case, otherwise 
than as wholesome, healthful, contented living, 
with good food and in healthful surroundings, 
may aid in bringing about a high productive 
efficiency. But the only way for society to 
consume more, to establish a high average of 
comfort, is to produce more. 

Q^. The question of wages is confused, as 
are many other economic questions, by a mis- 
understanding of the meaning of demand and 
supply. To say that the value of any com- 
None the less i^iodity is fixed by the equation of 
Lrantld^ demand and supply is a correct and 
supply. a safe enough proposition. But to 

suppose that the more laborers there are, the 



WAGES AND DISTRIBUTION 111 

lower wages will be, or that the fewer hours 
or the more lazily they work, the higher wages 
Avill be, is grossly to pervert the meaning 
of the demand and supply doctrine. The 
demand for labor, and the wages at which this 
demand will employ the labor, depend upon 
the value of the product which the laborers 
will bring to the employer. If a farm hand 
adds to the crop by only one bushel of wheat 
a day, it is certain that his wages will not 
stand at two bushels of wheat per day, or at 
an amount of money which will buy the two 
bushels. If operatives in a factory make each 
but one pair of shoes a day, they are safe from 
ever getting two pairs each for doing it. So 
if the population of any one city or of the 
world should double, wages would not fall by 
a half, or at all, unless the average produc- 
tiveness of labor fell as a result of the over- 
crowding and of the attendant disadvantages 
of opportunity. 

QQ. But something remains to be said in 
explanation of the wages of particular laborers 
or of particular classes of labor- Wages in par- 
ers. It is not to be inferred that tries, 
the employer always pays all he can. He 
employs men for the profit he gets out of it. 



112 ELEMENTARY ECONOMICS 

He will not pay more than the value to him 
of the labor or its product. How near he 
comes to a full payment will depend upon 
what the competition of his own or of other 
industries compels him to pay. The practical 
working of this competition will shortly come 
up for further discussion. 

Also it must be held in mind that precisely 
because wages depend on product, wages must 
be low if so many people work at one thing as 
to compel a low selling price in order to sell 
the entire product. We shall later see that 
this largely explains the low wages of women. 

Again, it is found that the same sort of work 
is well paid in one country and ill paid in 
and in different another. How explain, for exam- 

countries. pjg^ j^^^q J^ig]^ wagCS of clomcstic 

servants in America, and the relatively low 
wages in Europe? Do not the European 
servants do equally good work? Are not 
the results as valuable to the employer? Or 
is it true that Americans desire this sort of 
services more strongly than do Europeans? 
The difference is really in the demand. It is 
doubtless true in a sense that the low wages 
are a result of the large supply of laborers 
in this particular industry. But how great 



WAGES AND DISTRIBUTION 113 

this supply is depends on what wages other 
industries offer, and how many laborers they 
will take. That is to say the demand — the 
competition — that bears upon wages in any 
given industry or employment, is in largest part 
the demand or competition of other industries 
and employments. If domestic servants in 
Europe earn less in other employments than 
they can earn in these other employments in 
America, it will be possible to hire them as 
servants in Europe at lower wages than they 
can obtain as servants in America. Their 
producing powers as servants may be equally 
high there, but their producing powers in 
general are much lower there than in America. 
They will therefore have to work there as ser- 
vants at a lower marginal utility. In America 
we have to pay high if we get them to w^ork 
as servants. In Europe the employers might 
most of them be willing to pay equally high 
wages if they had to ; but they do not have to. 
The proposition therefore stands, that produc- 
tion fixes wages ; but we must look at the 
entire range of productive employment. 

67. It should now be clear and it is funda- 
mental that the first 'concern of society in the 
problem of distribution is to have the largest 



114 ELEMENTABY ECONOMICS 

possible product to divide. While we may 
„ „. ^ find reason in later discussions to 

Conflicts of 

interest in question how far human well-being 

production. . -, -. • j i > i 

IS bound up with the maximum com- 
mand of wealth, the question of distribution is 
evidently, for the various participants, a ques- 
tion of how to obtain the largest share in the dis- 
tribution. Behind distribution is production. 

For each of the factors in production there 
are but two possible methods of increasing its 
distributive share — (1) by increase in the total 
social output ; (2) by increase in one share at 
the expense of one or all of the others. 

Primarily the interests of all producers run 
parallel in the attempt to attain the highest 
possible social dividend. But in the distribu- 
tive process it is equally clear that the interests 
are adverse. When, for example, two boys 
go fishing or hunting on shares, harmony is 
probable until the time comes for dividing 
the spoils ; then peace is less certain. So 
partners in business are each as loyal to the 
partnership interests as either would be were 
the enterprise all his own ; against the busi- 
ness world they stand united. But in the 
division of the profit and in the settlement of the 
partnership accounts they are not one, but two. 



WAGES AND DISTRIBUTION 115 

Thus we must beware of the sweeping propo- 
sition that the interests of all classes of produ- 
cers are parallel, or that the interests of capital 
(capitalists) and labor (laborers), or of em- 
ploj^ers and employees, are one. They are never 
so in distribution, and are not always strictly 
so in production. This fact is strikingly illus- 
trated in trusts, monopolies, and combinations. 
It is to the interest of each that others should 
produce as much as possible ; but it is often to 
the interest of one producer that his own prod- 
uct be materially limited, and the price thereby 
increased. A small product may have a greater 
market value than a large. It is better to 
receive 50% of 75 than 30% of 100. At all 
events, the saving through smaller expense in 
wages and raw material generally outweighs 
any decrease in the value of the entire product. 

But excepting cases of this sort all producers 
are concerned in bringing about the largest 
possible production. 

68. If there were no employers and each 
man w^orked for himself, it is evident enough 
that more and better tools and That macMnery 
machinery, and more effective pro- qi^estiou. 
ductive processes and falling rates of interest 
on the use of capital would vastly benefit the 



116 ELEMENTARY ECONOMICS 

producers. It would be for each producer like 
a multiplication of his productive powers. 

But is the same thing true in the system of 
great employers and monster factories ? This 
is the question left over from the last chapter 
for discussion. We saw that the benefits of 
advancing civilization in better processes, larger 
capital, and improved machinery do not remain 
with the owners of wealth and capital ; but do 
they remain with the employers — the managers 
of the capitalized wealth? 

Evidently not entirely — for it is open to the 
laborer to work for himself if he prefer. ^ Many 
of them do this, and gradually themselves 
become employers of labor. Other laborers, 
again, find it more to their advantage to work 



1 As a practical fact, of course, insufficiency of capital, even 
for the simpler hand industries, makes an important limitation to 
this statement. It is true also that the mechanic, trained to one 
small part of an industrial process, is ill prepared to undertake 
the complete process on his own hehalf . But it is none the less 
true that if the position of wage-earner were not, on the whole, 
more desirable than that of independent producer, men could 
and would, as they once did, accept the methods and compensa- 
tions of the independent system. The condition of employee is 
imposed upon no one, otherwise than as it is self-imposed toy 
those who have judged it to toe the more advantageous opening ; 
and in large measure the decision is revocatole, if any one cared 
to revoke it. That latoorers would so rarely consider to return 
to the old method, no matter how readily open, is merely an- 
other aspect of the fact that the modern system is not purely 
for the toenefit of some one else than the latoorer. 



WAGES AND DISTRIBUTION 117 

for an employer. Each follows his line of 
greatest advantage or of least sacrifice. 

The employer-class exist because of their 
ability, by reason of the possession in peculiar 
degree of capital loaned or hired, or by reason 
of superior ability in management, or by reason 
of economies in production possible only in in- 
dustries conducted on a large scale, to procure 
from labor larger utilities and to provide for it 
a larger recompense, risks being considered, 
than laborers could obtain from society without 
the intervention of the employer. 

The demand of the employer is an interme- 
diate form of the demand of consumers for the 
goods produced. The employer Employer as a 

may be regarded as the agent or middleman is 

'J c:> iD subject to corn- 

representative of the social demand petition. 

engaged in the purchase of the productive 
power of labor, and compelled by competition, 
if effective, to recompense laborers approxi- 
mately in the proportion in which their ser- 
vices have contributed to the selling price of 
the product. No distinction in principle ex- 
ists for present purposes between the goods 
commonly termed services and those goods 
fixed and embodied in matter commonly termed 
commodities. 



118 ELEMENT ABY ECONOMICS 

69. Before we proceed to theoretical analysis, 
1-et us see how things go on in actual business. 

One shoe manufacturer, A, has exceptional 
ability of management ; he shows, we will say, 
unusual skill in directing men so as to get the 
most work out of them, or so as to make their 
work the most effective, — or he has exceptional 
skill in judging to whom to give credit, or in 
advertising, or in buying supplies, or in obtain- 
ing the top price for his goods. Evidently he 
The supply of ^^n employ his men as cheaply as 
employers. another employer, and sells his prod- 
uct on the same general market. He is making 
large profits, but not at the expense of wages 
or by higher prices to consumers. 

B, a competitor of less skill, finds it necessary 
to pay the same rate of wages and to sell on 
the same general level of prices. His inferior 
ability shows itself in lower profits. Still a 
third employer, C, has small skill in manage- 
ment ; he would almost better keep out of the 
race, — could make nearly as much by working 
for A or B. C is a marginal manufacturer. 
His outlays in wages and other expenses hold 
his profits down to nearly or quite to the wages 
mark ; if things get much closer with him, he 
will go out of business. Now suppose that A 



WAGES AND DISTRIBUTION 119 

decides to enlarge his trade by putting prices 
down a little, or that X, a wage-earner in hat- 
making, concludes to try his fortune at manu- 
facturing. It is time for C to drop out. If 
Y and Z enter the field, A and B will meet 
an increase of competition which may further 
force down prices and profits. Possibly B will 
become marginal and be the next to give up 
the struggle. A's profits suffer, but do not 
entirely disappear ; prices, however, are falling 
for consumers. 

It is of no use for the employers to try to 
hold up their profits by lowering wages. Even 
if they combine, the success can be only tempo- 
rary ; other industries will get the laborers, if 
those employers fix their wages below the mar- 
ket level. The only resource in the long run 
for getting exceptional profits is to form some 
sort of pool, or trust, or combination, and by 
limiting the product to push up the prices. 
We are now ready for the theory. 

Relatively to society, employers stand as a 
class of wage-earners whose remuneration, other 
things being equal, is competitively determined 
by the supply of them. As with other forms 
of wages or profits, so with employers' profits ; 
peculiar advantages in ability or capital will 



120 ELEMENTARY ECONOMICS 

bring correspondingly large returns, the amount 
of the profit being mostly determined by the 
degree in which the employer is able to reduce 
his expenses of production below those of the 
marginal producer, whose profits are practically 
of equal importance with the wages he could 
earn in working as wage-earner. A tendency 
toward a fall in the profits peculiar to ability, 
analogous to the tendency toward a fall in rents, 
exists as the differential advantages of ability 
become, by increase in intelligence and educa- 
tion, less marked. 

70. The line which separates the independent 
workman from the employer on the one hand 
and the wage-earner on the other is easily 
crossed. Wage-earners are continually chang- 
ing to self-employment, as are the self-employed 
to wage-earners or to employers. There are 
marginal wage- earners and marginal indepen- 
dent workmen — men who are upon the point 
of changing to employers. There are em- 
ployers whom any fall in profits will push into 
wage-earning or independent production, — 
marginal employers. It is then evident that 
the profits of employers are never safe from 
competition from the outside, and that wages 
and profits, being in truth but different as- 



WAGES AND DISTRIBUTION 121 

pects of reward for human activity, have a 
normal and natural relation to each other. The 
profits of the marginal employer are not greatly 
larger than the wages of employees. Employers 
of greater skill make proportionately greater 
profits. They produce and sell upon the same 
market conditions as does the marginal pro- 
ducer, but are able to reduce their outlay of 
production below his outlays. In the competi- 
tion of different employers with each other, the 
market price is the measure of the sacrifice of 
the marginal producer. The larger profits of 
other producers can, therefore, from no point 
of view be regarded as forming an addition to 
price. The marginal employer is driven from 
business by the ability of his competitors to 
achieve economies in production to which he 
cannot attain ; prices go too low for him. 

This competition of employers with each 
other is sharp and effective. They bid against 
each other for the services of capi- ^he competition 
tal as well as of labor. As more of employers. 
capital is offered and rates of interest fall, 
these competing producers find it possible to 
produce and sell at lower prices ; thereby by 
competition they cancel for each other the 
advantages of these lower rates of interest 



122 ELEMENTARY ECONOMICS 

upon capital. That is to say, the benefits of 
lower interest rates are passed along to con- 
sumers under tlie form of lower prices. 

71. It follows, then, that the increased social 
product due to the larger use of capital in the 
form of machines and labor-saving devices, is 
not intercepted by capitalists under the form 
of interest or by employers under the form of 
profits, but goes for the benefit of humanity as 
a whole, and is distributed among individuals 
or classes in proportion to their consumption. 
In their character of consumers, wage-earners 
get their share through the increasing purchas- 
ing power of their wages. As we have already 
seen, it is the competition of employers to 
obtain the services of laborers, which guaran- 
tees to the laborers a compensation proportion- 
ate to the services rendered. 

SUGGESTIVE QUESTIONS 

Who are ultimately benefited by lower rates of inter- 
est following upon larger supplies of capital? 

By lower rents ? 

By lower profits ? 

Do lower profits come about chiefly through payment 
of higher wages or through fall in prices ? 

How does the marginal law apply to employers? 

Do wages and profits tend to preserve any general 
relation to each other? (See Section 27.) 



WAGES AND DISTIilBUTION 123 

Does the laborer get wages in proportion at all to the 
profits of his employer ? 

Ought he? 

The wage-paying ability of what employer is commen- 
surate with market wages ? 

Is this fair to the wage-earner? 

Can it be changed by trades-unionism? 

Or in any other way? 



CHAPTER X 

POPULATION; INCREASING AND DIMINISHING 
RETURNS 

Look up Malthus in the Encyclopaedia. 

What bearing has density of population on rent? 

On wages ? 

Explain the law of the survival of the fittest as it ap- 
plies to the lower orders of life. 

Does it apply in equal degree to humanity in the com- 
plex conditions of modern life ? 

Do we let it apply ? 

Have lower orders of life any standard of comfort 
similar to that among men ? 

Do their standards change ? 

Do ours ? 

72. During the earlier years of this century 
the English Poor Laws were the subject of 
The Poor Law i^^^ch discussion and criticism, 
agitation. 'j^\jq provisions Under which help 

could be procured by the poor were extremely 
lax. As a practical fact all men so lacking in 
energy as to refuse to work, and so lacking in 
pride as to accept charity, found help waiting 
for them through special taxes levied for this 
124 



POPULATION 125 

purpose and called tlie poor rates. These taxes 
were assessed upon the cultivators of land. 
In some cases the poor rates became so great a 
burden as to bring about the abandonment of 
cultivation. In any case the ability of the 
cultivators to pay wages was seriously affected. 
The resulting lower wages made a still greater 
call for help from the rates. Industry and 
energy were discouraged, and a premium placed 
at their expense upon idleness and improvi- 
dence. But the full effect of these injudicious 
laws did not stop with this. Aid was given to 
pauper families in proportion to the size of the 
family. To the pauper this meant that the 
more children he had the more help he could 
get. As it became more difficult for the in- 
dustrious man to support his famil}^ it became 
more easy for the shiftless. A direct incentive 
was given for the multiplication of the shift- 
less, English agriculture was made to suffer 
in order that English manhood might be de- 
graded. 

73. Most effective among the protests against 
this system was the celebrated Essay upon the 
Principle of Population^ written by the Rev. 
Thomas R. Malthus, a clergyman in the Eng- 
lish Church, who held, for a large part of his 



126 ELEMENTARY ECONOMICS 

life, a professorship in Political Economy and 
History in an educational institution belonging 
to the East India Company at Haileybury, Eng- 
land. 

Malthus went much further than merely to 
condemn the artificial stimulus to improvident 
child-bearing. He elaborated two general 
propositions of great importance. The first 
was in substance what we have already stated 
as the law of diminishing returns in agriculture 
— the assertion that with increasing demand 
for food products there is a marked increase in 
the difficulty of procuring them. Over-popu- 
lation is therefore linked with poverty. His 
second proposition was that the tendency of the 
human race is strongly toward over-population, 
and that nothing but conscious and continuous 
resistance can overcome this tendency. 

74. Setting aside all investigation of what 
tendencies are likely to develop with regard to 
Production and population, wc are none the less 
population. concerned to determine what effect 
will come from an increase of population, should 
such increase take place. The agricultural law 
of diminishing returns is of especial importance 
in this regard, by virtue of its bearing upon the 
productive power of human labor. First we 



POPULATION 12T 

must observe that over-sparseness of popula- 
tion is unfavorable either to the production of 
wealth or to the development of civilization. 
Pushed by increasing numbers men swarm from 
the parent hive somewhat as do bees. Migra- 
tions to new continents, the development of the 
variety of natural resources which different re- 
gions present, the groAvth of international trade, 
the exchange of the different products of art 
and science and industry, and the accompanying 
interchange of science, thought, literature, and 
institutions, make powerfully for the material 
and intellectual progress of the race. Hunting 
or pastoral or purely agricultural types of 
society are rarely progressive. Even upon the 
farm, and still more noticeably in the shop, the 
advantages of associated effort are apparent. 
One man to pitch up the hay and another to 
make the load are of mutual advantage. New 
colonies often suffer acutely from lack of 
numbers. 

75. But just as on the farm there comes a 
point at which an increase in the number of 
laborers takes place only at a lower DimmisMng 
per caiyita productiveness, so in a returns. 
state or continent there may come about a con- 
dition of over-population. The very fact that 



128 ELEMENTARY ECONOMICS 

nations swarm is a proof of this. After a cer- 
tain point is reached, the tendency of over- 
population is toward a reduced productiveness 
of labor, and therefore toward lower wages for 
the laborers. This is the old law of diminish- 
ing returns. 

Proceeding in substance upon this law as a 
basis it was urged by Malthus, and is still urged 
Is overpopuia- "^y many economists, that the world 
tion coming? jg unavoidably set toward poverty 
— that the human race, like all other orders of 
life, is certain to increase in numbers until 
starvation sets a limit, unless, indeed, the 
human race, unlike the lower orders, shall take 
thought of its tendencies and set itself to 
rational, purposed, continuous resistance. 

76. All orders of vegetable life press hard 
upon one another, and increase to the limit of 
their opportunity. The weaker go to the wall 
simply because the stronger are pushing for 
place. Wherever fertility allows and condi- 
tions permit, there life multiplies to the limit 
of possibility. The stress never relaxes, or if 
it relaxes gives only a short respite for a more 
rapid increase. Vegetable life maintains itself 
primarily upon the inorganic, or, as we com- 
monly say, the mineral, and in turn furnishes 



POPULATION 129 

the nourishment upon which the animal king- 
dom is maintained. True, animal life may prey 
upon itself, but its ultimate supply of nourish- 
ment is found in the vegetable kingdom. In 
this power of A^egetable life to assimilate inor- 
ganic matter, and in the dependence of the 
animal kingdom upon the vegetable, is found 
the ultimate basis of the classification into the 
three kingdoms. Vegetable life is distin- 
guished from animal life by this power of 
assimilation of inorganic matter. All flesh is 
indeed grass, as the horse in the old song is 
said to have pleaded in excuse for biting his 
master. While one form of animal life is the 
prey of another, it is only as an intermediate 
form of grass. Although some day the scien- 
tists may tell us how to obtain from the nitro- 
gen in the air and the coal in the bin our 
necessary food, it remains certain that till then 
the number of human beings upon the earth 
must be limited by the capacity of the earth to 
bring forth its supplies of vegetable product. 

All orders of brute life disclose the same ten- 
dency toward increase which we have remarked 
in the vegetable world. The limit is the limit 
of subsistence, modified only by the measure 
in which animal life jjreys upon itself. 



130 ELEMENT AUY ECONOMICS 

But humanity is rarely the prey of other 
orders, and war and murder do not, in modern 
days, greatly affect the total of the world's 
census. Famine is not common, epidemics are 
mostly famine in disguise, and famine itself 
is merely temporary insufficiency in vegetable 
product. The world has made an unexampled 
increase in population during the last two hun- 
dred years. Where is it to stop, unless when 
famine has become the normal and usual state 
of man ? 

We have not space to examine closely into 
the correctness of this gloomy Malthusian fore- 
cast, but only to bring clearly into view its dif- 
ferent and difficult aspects. There is room for 
question how far what is true of vegetable and 
brute life can be assumed to hold with the 
human race. If, as nations and individuals 
prosper increasingly in resources, wealth, and 
civilization, they come to bring into the world 
and to rear fewer and fewer children rather 
than more, there is need enough to worry, but 
for an altogether different reason from that of 
the Malthusian foreboding. What is your ob- 
servation as to the homes which contain the 
most children? Do the children indicate by 
their number the relative wealth of parents, 



POPULATION 131 

and their relative ability to furnish sufficient 
bread and butter for the child appetite ? Is it 
the rich or the poor who are prolific ? 

77. At any rate, the law of diminishing 
returns appears to apply chiefly to the agri- 
cultural industries — the industries of raw 
material. How far, if at all, it applies to min- 
ing or to sea-fisheries is not so clear. And it 
may happen that other industries disclose as 
important tendencies toward increased produc- 
tiveness. Such, indeed, is the fact. While 
the race may find it increasingly harder to pro- 
duce its food, it may have an increasingly 
larger share of time and capital to apply 
thereto. The tendency by which this becomes 
possible is called the law of increasing returns. 

In a sparsely settled country enterprise will 
commonl}^ be found to busy itself for the most 
part with the extractive industries „, , 

^ The law of 

— the industries of raw material — increasing 
since these are the industries which, 
for the time, offer the highest remunerations 
and require the smallest outlay of capital. 
But these are the industries to which the law 
of diminishing returns applies. As population 
increases, this law tends to become increasingly 
manifest, and the advantages of the extractive 



132 ELEMENTARY ECONOMICS 

industries correspondingly less. On the other 
hand, as population and capital increase, the 
relative disadvantages of manufacturing and 
kindred industries decrease. Manufacturing 
industries soon gain a foothold; nor is this 
entirely due to the tendency toward diminish- 
ing returns in extractive industries; it is in 
part due, also, to the tendency toward increas- 
ing returns manifested in other industries. 
It is easier to make ten hats after one pattern 
than to make ten different patterns of hats. 
This is true even with the methods of hand 
industry, and more noticeably true in more 
highly developed conditions. The larger the 
market, the greater the possible economies in 
production; the more extended the division of 
labor, the more marked the advantages to be 
derived from machinery, and the more im- 
portant the economies possible in the use of 
capital. Every improvement in transportation 
which enables a larger number of customers to 
be served from one centre of supply, renders 
possible larger economies of production at this 
centre. An increase in population acts in a 
parallel manner. So manifest is this tendency 
toward diminished proportional expense in 
manufacturing industries, that it is rarely over- 



POPULATION 133 

come by the tendency toward advancing ex- 
pense characteristic of raw material, excepting 
in cases where the manufacturing processes 
have comparatively small part in the cost of 
the finished product. It follows, then, that if 
food comes to require more time and effort to 
get it, the race will have more time and effort 
to spare for that purpose. 

78. It is not clear that, as usually stated, the 
tendency toward increasing returns deserves 
to be termed a law. The economies j^ ^i,,,, ^^^^ ^ 
possible from larger markets and i^^- 
increased division of labor give no indication 
of being inexhaustible. But the tendency 
toward increased productiveness, through the 
development of man in tastes and desires, as 
well as in the science and technique of indus- 
try, is seemingly persistent. On this side 
alone the law of increasing returns is open to 
no question. 

SUGGESTIVE QUESTIONS 

Why have cities grown so rapidly within the last fifty 



years 



What kinds of business centre in cities? 

Do improvements in agriculture tend chiefly to the in- 
crease of the rural or of the urban population ? 

Is the great growth of cities peculiar to the United 
States? 



134 ELEMENTARY ECONOMICS 

Are there proportionally more or fewer people em- 
ployed in agriculture now than fifty years ago ? Why ? 

Is this growth of cities likely to continue? 

What effect will improvements in transportation have ? 
Improvements in machinery? 

What effect from improved suburban transportation on 
the density of cities ? 

What effect may the electric motor as power have on 
the large-factory system? In what degree? 



CHAPTER XI 

MONEY GENERALLY 

Why is the value of gold more stable than that of coal 
or iron? 

In what sense is the value of gold fixed by sacrifices of 
production ? Is this a quick or a slow process ? 

In what sense can money be consumed ? 

What do you intend to do with the next money you 
get? 

If a ten-dollar bill were given yon on the condition 
that you should always keep it, would it be worth your 
while? 

If a hundred-dollar bill were given you, would this in- 
crease the total wealth of the world ? 

Would it increase your wealth? 

Suppose each man's cash were increased by one hun- 
dred dollars, would this increase the wealth of the world ? 

If the money in the possession of each member of 
society were doubled, would this increase the wealth of 
any individual ? 

Do you suppose that after this doubling, each dollar 
would buy as much as before? 

If there were no money, how would you go to work to 
buy a book ? Would the bookseller be willing to take 
hay in payment ? 

Why would not iron make good money? Brass? 
Wheat? Cattle? Hay? Diamonds? Tobacco? 

So far as we now see, in what important respects do 
135 



136 ELEMENTA B Y ECONOMICS 

gold and silver differ in characteristics from the above- 
named substances? 

Mention some uses for gold and silver other than as 
money. 

Is paper money useful otherwise than as money? 

Mention some of the advantages of division of 
labour. 

79. It was sufficiently explained in the open- 
ing chapter that people want money only in the 
sense that they want the things which money 
will buy. When you sell something, your pur- 
pose does not stop with getting the money. 
That is only a half-way stage toward getting 
the things you want in place of what you sell. 
That is to say, the receipt of money marks the 
half-way point in an exchange of goods. It 
may of course be true that when you sell and 
get the money you may not know what you are 
going to buy, but if you were never to buy 
anything, you would have preferred to keep the 
thing you had. And so, as was said in Sec- 
tion 2, when we speak of the love of money we 
really have in mind the love of the things in 
life which are bought and sold. Money stands 
only as a general symbol. In substance it is a 
power of purchase founded on the fact of a 
prior sale or service. 

80. The function of money is analogous to 



MONET GENERALLY 137 

that of tools ; we do not desire these for them- 
selves, but for the things they enable ^j.^^ use does 
us to do; we do not desire labor for ^o^®y s^^^^"^ 
itself, but for the things which it produces ; so 
money is helpful because it enables us easily 
and conveniently to make exchanges of goods. 
Barter would be an inconvenient and imprac- 
ticable way of carrying on exchanges. The 
advantages of currency are best illustrated by 
assuming the absence of it: suppose that A 
desires to exchange hats for boots; B has boots, 
but refuses to trade with A, because B himself 
wants, not hats, but flour. If it turns out that 
C, who has coats, wants neither boots nor hats 
but potatoes, the three men can do nothing 
with each other. A must hunt about until he 
finds some one who has boots and wants hats; 

B, some one who has flour and wants boots; 

C, some one who has potatoes and wants coats. 
And even if A finds a man having boots and 
wanting hats, it may be impossible to trade 
because of a difference in value between the 
desired quantity of boots and the desired quan- 
tity of hats. B and C may meet with similar 
difficulties. Jevons gives the following illus- 
trations: "Some years since. Mademoiselle 
Zelie, a singer of the Theatre Lyrique at Paris, 



138 ELEMENTABY ECONOMICS 

made a professional tour round the world, and 
gave a concert in the Society Islands. In ex- 
change for an air from Norma and a few other 
songs, she was to receive a third part of the 
receipts. When counted, her share was found 
to consist of three pigs, 23 turkeys, 44 chickens, 
5000 cocoanuts, besides considerable quantities 
of bananas, lemons, and oranges. At the Halle 
in Paris, as the prima donna remarked, this 
amount of livestock and vegetables might have 
brought 4000 francs, which would have been 
good remuneration for five songs. In the So- 
ciety Islands, however, pieces of money were 
very scarce, and, as Mademoiselle could not 
consume any considerable portion of the re- 
ceipts herself, it became necessary, in the mean- 
time, to feed the pigs and poultry with the 
fruit. . . . When Mr. Wallace was travelling 
in the Malay Archipelago, he seems to have 
suffered rather from the scarcity than the super- 
abundance of provisions. In his most interest- 
ing account of his travels, he tells us that in 
some of the islands where there was no projDcr 
currency, he could not procure supplies for 
dinner without a special bargain, and much 
chaffering upon each occasion. If a vendor of 
fish or other coveted eatables did not meet with 



MONEY GENERALLY 139 

the sort of exchange desired, he would pass on, 
and Mr. Wallace and his party had to go with- 
out their dinner. It therefore became very 
desirable to keep on hand a supply of articles, 
such as knives, pieces of cloth, arrack, or sago 
cakes, to multiply the chance that one or other 
article would suit the itinerant merchant." 

If trading were impossible, each of us would 
have to produce everything that he consumed; 
we should be Jacks at all trades, masters of 
none. Under the opportunities of exchange, 
individuals and nations follow the lines of their 
greatest ability and advantage, and exchange 
their surplus in product for the surplus of 
others. Thus the aggregate social product is 
increased, and thereby the individual share — 
the quotient — is enlarged. Currenc}^ facili- 
tates this specialization of labor, commonly 
termed division of labor, by facilitating ex- 
changes. Whenever we trade, it is because 
the thing that we get we value more highly 
than the thing that we part with. Money, or 
more accurately currency, is a means of trans- 
portation as truly as are railroads and steam- 
ships. 

81. It is important to understand what 
qualities are essential in any material used for 



140 ELEMENTARY ECONOMICS 

money. Primarily the money commodity must 
be adapted to the needs of ordinary cash ex- 
The necessary changes: great purchasing power 
qualities. must be Contained in small bulk; 

all specimens must be of equal quality; divi- 
sion and combination must be possible without 
loss of value ; the value must not be so great as 
to render the medium over minute for small 
transactions. Hay would be too bulky and 
too variable in quality; diamonds too valu- 
able, too variable, and practically not subject 
to subdivision or recombination. The pin 
and needle business would not flourish with 
diamonds for money. Any material which 
should answer these requirements would serve 
acceptably as a medium of exchange, were it 
not for the fact that exchanges are sometimes 
a long while in completing themselves. When 
you sell your hats you may not want immedi- 
ately to purchase their equivalent; possibly 
you do not yet know what you will purchase, 
or, if you know, you are not yet in want of the 
thing. Thus the money which you get must 
be something which will not fall in purchasing 
power by reason of chemical changes or by 
reason of fluctuations in supply. Your money 
is a note of demand payable by society in market 



MONEY GEN Eli ALLY 141 

products. Wheat and hay would deteriorate in 
quality, and are at one time abundant and at 
another time in short supply. 

82. Again, while not so clearly, yet ulti- 
mately as truly, all cases of mortgages, notes 
and bonds, bank deposits, and 

. Credit is 

credits m general are protracted protracted 
instances of exchange. The whole- ®^^ ^^^®' 
saler sells his groceries at three months' time. 
Instead of receiving his pay immediately in 
commodities, or in money with which to buy 
commodities, the payment side of the trade is 
postponed for a term of months. It is im- 
portant, then, that the medium of exchange 
shall not vary in purchasing power. When 
you lend, you really sell the right to things; 
when you are repaid, you get things in return. 
Thus a loan is, in essence, a long-time barter. 
When 3^ou have sold your hats, you allow X 
to take the money for which they sell. It 
is the same as if you had sold X the hats or 
the goods which he buys with the money. 
When he pays you, he really returns to you 
your remuneration for the hats. If the pay- 
ment is a fair one, the money in which he pays 
must not have gained or lost in its control over 
the means of satisfying human needs. Thus, 



142 ELEMENTARY ECONOMICS 

money has to serve not only as a medium of 
quick exchanges, but as a standard of deferred 
payments — a means of effecting exchanges re- 
quiring long periods of time for their com- 
pletion. 

83. Gold and silver approximate most nearly 
of all commodities to these requirements. Nei- 
ther is greatly subject to rust, decay, or chemical 
action. Both are absolutely uniform in quality 
wherever found, and are subject, without loss 
of value, to division and combination. Both 
comprise large value in small bulk. Not only 
this, but the annual product of each is so small 
in proportion to the entire supply, that rapid 
fluctuations in value from supply causes are im- 
possible. An amount of water which, poured 
into a washtub, will noticeably change its level, 
will not greatly affect the depth of a cistern. 

84. Currency has, then, three distinct func- 
tions: that (1) of facilitating ordinary ex- 
changes; (2) of serving as a measure of value 
in current business ; (3) of affording a standard 
of deferred payments or a reservoir of savings. 

85. Now while all agree that gold and silver 
possess, in a remarkable degree, the qualities 
desirable in money, no one will assert that 
either can be regarded as an ideal money. The 



MONEY GENERALLY 143 

failure chiefly lies in this third function — that 
of serving as a standard of deferred payments. 
It is sometimes argued that if one i^ there an ideal 
has borrowed an ounce of gold, or J^ioi^ey? 
a dollar of gold, or a pound of gold, he ought 
to be willing to return an equal weight in paj^- 
ment, just as if he had borrowed a ton of iron 
or a barrel of flour. The iron or the flour 
may have changed in value either by rise or 
fall, but this is a risk v^hich each party to the 
contract accepts and from which no agreement 
to be performed in the future can be free. No 
one is wronged; the contract is a fair one — 
only it is in some measure speculative. So it 
is urged with respect to gold ; one has borrowed 
a pound — let him return a pound. No one 
can expect either gold or silver to be absolutely 
stable upon the market, relatively to other com- 
modities — that is, to preserve an unfluctuating 
exchange pov^er. Everybody knov^s that some- 
times prices rise on the average and again they 
fall — that is to say, gold increases or loses in 
purchasing powder, and there seems to be no way 
to help it. Gold is a commodity like other 
commodities ; while it may fluctuate less than 
others, it can hardly be expected to be free 
from all fluctuation. How is the debtor 



144 ELEMENT AEY ECONOMICS 

wronged, if, wlien the time of payment comes, 
the gold will buy more than when it was bor- 
rowed? Suppose the creditor not to have 
loaned, or suppose the debtor to have kept in 
hand the very gold coins which he borrowed; 
why should the creditor be worse off for having 
loaned or the debtor differently treated for hav- 
ing spent? Would he likewise object to carry- 
ing out a contract for flour or iron ? 

But an ideal money would be a money that 
did not fluctuate in purchasing power. Possi- 
bly enough there will never be found an ideal 
money ; probably there will not. It may be that 
there is less of speculation in gold contracts 
than in other contracts, but a perfect money 
would not be speculative at all. When we 
buy wheat, or cattle, or groceries, we commonly 
promise to repay in money rather than in kind 
precisely because we want to attain as nearly as 
possible to an equality of purchasing power be- 
tween what was received and what is returned. 
If the standard of payment itself fluctuates, 
this is in itself an evil. 

We must remember also that one does not 
borrow money for the purpose of consuming 
it, but of spending it. So when the lender is 
paid he uses the money for reinvestment or 



MONEY GENERALLY 145 

for purchases, and not as a commodity to be 
consumed. 

86. The fluctuation of the purchasing poAver 
of money is so slight that it does not materially 
interfere with the ordinary day-to- „ 

^ ^ ^ How tnis bears 

day business. It is only in long- upon the silver 
time contracts that the question be- ^^^^ ^°^' 
comes of great importance. As bearing upon 
American political questions, it is now, for ex- 
ample, of great interest to determine whether 
gold has not in the past twenty or twenty-five 
years considerably increased in purchasing 
power, and if so, in what degree. The advo- 
cates of silver coinage make it one ground of 
attack upon the gold standard, that under it 
the debtor is constantly put to loss to the corre- 
sponding advantage of the creditor. In sup- 
port of this they point to the general fall in 
prices, which they assert to have taken place 
for a number of years and to be still taking 
place. The opponents of silver coinage meet 
this attack in different ways. Some deny any 
general or average fall in prices. Will this 
denial hold? Others admit the fall, but insist 
that this is not an increase in the value of 
gold, but rather a decrease in the value of other 
commodities, consequent upon the cheapening 



146 ELEMENTARY ECONOMICS 

of the methods of production. Do you see what 
they mean by this ? What is value ? ^ 

87. We have seen that the utility of cur- 
rency lies, for the most part, in its service in 
The demand for facilitating exchanges. There is, 
money. then, as truly a demand for money 

as for any other commodity. The demand for 
a medium of exchange is approximately meas- 
ured by the volume of exchanges to be made. 

1 The Silver Question. — From 1831 up to 1873 a certain 
weight of gold or sixteen times this weight of silver was per- 
mitted under the United States law to be coined as a dollar ; 
any one in possession of either gold or silver was entitled free 
of charge to have these stamped at the mint as money, a given 
weight of silver making one-sixteenth as much money as a like 
weight of gold. This is what is meant by free coinage of gold 
and silver at the ratio of 16 to 1. Practically no silver was ever 
coined under this law, because silver was too valuable relatively 
to gold. Evidently if silver were of equal value with gold, 
weight for weight, no one would have it stamped as money at a 
ratio of 16 to 1. This would be to stamp sixteen gold dollars 
worth of silver as worth one dollar. So if silver were at the 
ratio of 15 to 1, that is, worth one-fifteenth of gold, no coining 
of silver would be done at a valuation of one-sixteenth. The 
reason that no coinage of silver was ever done under so-called 
free coinage was that silver never came to be worth as little as 
one-sixteenth of gold till 1873, and a little before this point 
was reached the coinage right was withdrawn. Gold has since 
remained the only metal freely coined for whoever may present 
it. The silver which has been coined since that time, as well 
as that coined before, has been bought by the government and 
made into money, just as are nickel and copper, without any 
attempt to make the bullion value equal to the face value. 

The ratio of silver to gold is now about 33 to 1. It is asserted 
by the opponents of free silver that as long as gold is worth 
thirty-three times as much as silver, it cannot be coined or 
kept in circulation if treated as only worth sixteen times as 
much, — that silver would be coined in immense quantities. 



MONEY GENERALLY 147 

We say approximately, since barter is always 
possible, though ordinarily not of considerable 
volume. 

Clearly enough there would be no necessity 
for money and no demand for it, if each of us 
were to produce everything that he 

. . Demand limited 

consumed. it is equally obvious by division of 

that division of labor becomes pos- ^ °^' 

sible only on terms of possible exchange of 

and the purchasing power of the dollar lowered to something 
like one-half what it now is. They reason that gold would 
entirely disappear from circulation as money, according to 
Gresham's Law. 

Of the advocates of free silver, one part believe that with 
free coinage silver would be so raised in value by the increased 
demand, and gold so lowered in value by the sui)plies set free 
from use as money and thrown upon the market, that the ratio 
would return to 16 to 1, and the two metals circulate side by 
side as money. These are the National Bimetallists. Others of 
these advocates admit that gold would be excluded from circu- 
lation. These are the Silver Monometallists. The International 
Bimetallists believe the co-operation of the European nations 
necessary in fixing the coinage ratio. Some of these regard 16 
to 1 as a practicable ratio ; others advise a higher ratio. 

The extent of your investigations into the silver question 
must rest with yourself and your teacher ; the subject is too 
large for adequate treatment in an elementary course. The 
writer may, however, remark in passing that he does not con- 
cur in either of the methods, set forth in the text, of meeting 
the silver argument ; that he believes that prices have consider- 
ably fallen in the last twenty-five years ; and that this fall is 
not entirely, or even in larger part, to be ascribed to temporary 
disturbances in the way of crisis or panic. He is also disposed 
to admit that had our government, in 1873, adhered to silver 
as a standard instead of gold, the silver standard would have 
afforded a much closer approximation to the ideal than has 
gold ; and yet he does not favor a return to the free coinage of 
silver in America alone on any terms. 



148 ELEMENTARY ECONOMICS 

products. It now becomes important to note 
that, population and per capita production 
remaining the same, the volume of exchanges 
increases as division of labor is more extended; 
that the aggregate of exchanges is approxi- 
mately limited by the degree in which division 
of labor is extended; and that, therefore, the 
advantages of exchange are exhausted when no 
further economies in production are promised 
by an increased division of labor. 

88. But population and per capita pro- 
ductiveness do not remain stationary; the 
Demand is population of the earth is rapidly 
increasing. increasing; the development, also, 
of the sciences and arts, and of machinery and 
trans]Dortation, not only stimulates the division 
of labor, the specialization of industry, but 
increases the per capita production of commodi- 
ties. The ends of the earth now trade with 
each other. 

It ought, then, to be clear that the need for 
currency is not proportionate to population 
alone, or to wealth, or even to per capita pro- 
ductiveness alone. It is the volume of ex- 
changing to be performed which furnishes the 
measure of the demand for currency. This is 
largely a matter of degree of civilization and 



MONEY GENEEALLY 149 

manner of industrial organization. In a gen- 
eral way, the per capita requirement for cur- 
rency is enlarging. No amount can be said to 
be required per capita simply, but only per 
capita in view of the average productive effi- 
ciency and the established industrial methods. 
A sufficient per capita for one country may be 
entirely inadequate for another. 

89. The value of the currency unit, the dol- 
lar or franc or pound, is the point of adjustment 
between the demand for currency ^he value of the 
and the supply of currency. To ^^^^y "^^^■ 
this extent, there is nothing difficult or pe- 
culiar in currency principles. If the demand 
increases without a correspondingly increasing 
supply, money rises, that is, prices fall. So, 
increases in supply tend toward higher prices, 
that is, toward depreciation in the purchasing 
power of the money unit. If the relation 
between demand and supply changes, the value 
of the unit changes to correspond. A perma- 
nently insufficient currency is therefore an im- 
possibility; prices must fall until at the new 
unit value the supply is sufficient. So, if the 
currency is redundant, prices rise until the 
redundancy is cancelled. Currency is like a 
gas which always fills its receptacle. A cur- 



150 ELEMENTARY ECONOMICS 

rency out of equilibrium is always in process 
of becoming sufficient. But this process of 
becoming is rarely a comfortable one, and is 
always attended with injustice, and commonly 
with disaster, as will be more clearly seen in 
our examination of commercial crises. These 
fluctuations in prices are to be avoided if 
possible. It is b}^ this test, then, that the 
normal supply of money is best determined. 
A supply sufficient in kind and quantity to 
preserve unchanged the purchasing power of 
the dollar would be the ideal condition for 
all ordinary cases. 

SUGGESTIVE QUESTIONS 

Explain the analogy between exchange and transpor- 
tation. 

Outline inconveniences of doing business without a 
medium of exchange. 

Show that a sale for money is only half of an exchange 
of goods. 

Show that a loan and repayment of money really equal 
an exchange of commodities. 

What forces are working to increase the demand for a 
circulating medium? 

As far as you can see, is gold alone, or are gold and 
silver together, increasing in volume with a rapidity cor- 
responding to the demand ? 

If not, what strikes you as a necessary result ? 



DEMAND AND SUPPLY OF CUBRENCY 151 

What will happen if currency is in excess? Is insuf- 
ficient? 

Who are injured when prices rise? 
Who, when prices fall? 



DEMAND AND SUPPLY OF CURRENCY 

What effect would falling prices have on the produc- 
tion of gold ? 

Would this result probably be sufficient fully to over- 
come the tendency toward a fall in prices ? 

What effect would an increased output of gold at the 
mines have? 

Suppose the output of this year to be double that of 
last year ; would this double prices ? 

Have you any gold about your person ? 

Is it in the form of money ? In what forms ? 

What effect would more plentiful gold have on its use 
for other than currency purposes ? 

Would this effect be sufficient entirely to prevent a 
rise in prices ? 

90. In a general way the nature of the 
demand for currency is clear enough. This 
demand rests upon the utility of currency in 
permitting the division of labor, which divi- 
sion of labor becomes possible only on condition 
of possible exchange of products. With cur- 
rency, as with all other commodities, value 
marks the equilibrium point between demand 
and supply. As the business to be transacted 



152 ELEMENT AUY ECONOMICS 

becomes greater, the value of currency will rise, 
that is to say, prices will fall — money will buy 
more — unless at the same time the supply 
of currency expands. If. the volume of the 
currency increases, prices will tend to rise — 
that is to say, a given amount of currency will 
buy less goods. 

91. As has been said, the demand for cur- 
rency results from the disposition to trade — 

„ , to exchange thinp-s. Now note that 

The cause of the ^ ... 

demand for this disposition to trade is strong 
money. ^^^^^ .^^ proportion as there are ad- 

vantages to be obtained thereby. Both buyer 
and seller believe themselves to be benefited in 
every trade, else they will not trade. The 
quantities, therefore, which we have already 
studied as buyers' and sellers' quasi-rents 
explain the demand for currency. 

92. But there are many things owned by us 
which we would hardly sell at any price, or, at 

all events, at anything which any 

Should currency i i • -^r t • i 

be equal to One would givc. You Ordinarily 
wealth? ^^^ things because you want them 

for use and not for re-sale. Whatever you sell, 
you sell with a view to replacing it by another 
thing which you want more. When you have 
obtained this other thing, you commonly intend 



DEMAND AND SUPPLY OF CURRENCY 153 

to keep it; that is why you bought it. Thus, 
only a small part of the wealth of the world 
goes to swell the demand for currency — only 
that part which is being offered for sale at any 
particular moment. Those people evidently 
misunderstand the case who believe there must 
be as much money as there is wealth, or who 
fancy that the general welfare would be in- 
creased by indefinitely increasing the number 
of dollars. 

93. We must now briefly examine some of 
the sources of supply of currency. Almost all 
peoples use, in some measure, either ■^]ieiice comes 
silver or gold as money. Where *^® supply? 
this is true, and where also it is true, as it 
generally is, that anybody having the bullion 
can have it stamped as money, the value of the 
money will be equal to the value of the bullion 
which it contains, and the purchasing power of 
the money will equal the marginal cost of pro- 
duction of the bullion. That is to say, if a 
day's labor applied to gold digging will procure 
more hats than will a day's labor applied di- 
rectly to hat making, the production of gold 
will increase until this advantage is cancelled. 
Thus, any increase in the purchasing power of 
money will tend to stimulate the production of 



154 ELEMENTARY ECONOMICS 

the money metal, and after time enough has 
elapsed, the value of the money will come to 
equal the marginal cost of producing it. 

94. Suppose, however, that a great increase 
takes place in the product of the mines, richer 
Effect of in- niines having been discovered or 
creased supply, better processes of working them 
devised. This will tend to enlarge the volume 
of currency and thus to raise prices. But not 
all the new product will be made into money. 
Not all the gold already produced is used as 
money. Increased supplies would lower its 
value, and gold would come to be employed 
for many new uses as well as in larger measure 
for old uses. Only a part of the new product 
would go to expand the volume of currency. 

In the next chapter we shall examine the 
ways in which paper and credit come, for some 
purposes, to take the place of money. We 
are, however, already prepared to note one im- 
portant difference between a currency having a 
real commodity value — a currency marketable 
for ordinary use and consumption — and a cur- 
rency made, for example, of paper, and having 
no value, or an inappreciable value, for other 
than currency uses. A considerable increase 
in the supply of gold would not considerably 



DEMAND AND SUPPLY OF CURRENCY 155 

affect the amount of gold used as money, if 
the ordinary market demand were capable with- 
out a great change in value of absorbing the 
larger portion of the new suppl}^ At any 
rate, to increase the world's supply of gold by 
an amount equal to the volume used as money 
would not be to double the amount used as 
money. But with paper the case is different. 
Paper put out as money will remain as money 
unless it gets paid back to the government or 
becomes so worthless as to be used for rags. 
The supply adjusts itself to the demand only 
by a fall in purchasing power — a rise in prices 
— proportional to the increase in volume. 

DIFFERENT KINDS OF CURRENCY 

The following is the report of a typical coun- 
try bank in the fall of 1894. A careful analysis 
should be made of this report. Notice that the 
bank has, of capital, surplus funds, and undi- 
vided profits, about $76,000 invested, and has 
with it upon deposit 1255,887.94 : — 



156 



ELEMENTARY ECONOMICS 



FIEST NATIONAL BANK 
Chaeles City (Iowa), 1894 



Loans and dis- 
counts .... $237,600 40 

Overdrafts ... 385 36 

U. S. Bonds to se- 
cure circulation 12,500 00 

Due from other Na- 
tional Banks . 32,713 04 

Furniture and fixt- 
ures 1,000 00 

Due from State 
Banks and bank- 
ers 782 52 

Due from approved 
reserve agents . 24,888 90 

Checks and other 
cash items . . 1,649 79 

Bills of other Na- 
tional Banks . . 7,972 00 

Fractional cur- 
rency .... 93 63 

Specie 10,035 50 

Legal tender notes 8,000 00 

Kedemption fund 
with U. S. Treas- 
urer 562 50 



Total $338,181 64 



Capital stock paid 
in $50,000 00 



Surplus fund 



10,000 00 



Undivided profits 
less current ex- 
penses and taxes 
paid 16,533 70 

National Bank 
Notes outstand- 
ing 5,760 00 

Individual deposits 255,887 94 



Total $338,181 64 



QUESTIONS 

Show what has become of this money. 

How much in notes or overdrafts is due the bank from 
borrowers ? 

How much has been loaned to other banks by way of 
deposits ? 



DEMAND AND SUPPLY OF CURRENCY 157 

How much may this bank be called upon to pay on 
any day ? 

What are its immediate resom'ces for this purpose? 

How much cash has it on hand ? 

How much of this is gold or silver ? 

How much of its resources are in the form of demand 
rights against other banks ? 

What has the bank, in fact, to show for this depositors' 
money? 

How are national bank notes secured? 

In what payable ? 

Get one of these notes and see what the bank agrees 
to do. 

Is it probable that all depositors will call for their 
money at one time ? 

What would happen if they did ? 

Would there be much profit in banking if, for every 
dollar left at the bank, the bank must keep a dollar on 
hand? 



95. Suppose that D gives to L an order upon 
you for fifty dollars. L pays a grocery bill 
with this, and the g^rocer brino-s „ 

' ° ^ How credit 

it to you and discharges a claim serves as cur- 
which you hold against him for ^^^°'^' 
that amount; you tear up the order. A large 
amount of business has been transacted by 
the use of this order and without the need of 
money. Credit has served as a substitute for 
money. 

So when you pay a debt by a check upon the 



158 ELEMENTARY ECONOMICS 

bank, this check may pass through several 
hands, clomg work similar to that of money, 
permitting exchanges, making payments, etc., 
and finally, when the check comes to the bank, 
it is merely charged np to you and credited to 
the person who deposits it. No money need 
have been used in the entire series of trans- 
actions. 

We thus see that the circulating medium is 
composed of different elements. The student 
may have been puzzled by the use in one place 
of the term "money" and in another of the 
term "currency." Money and currency are not 
equivalent terms. Currency includes all forms 
of exchange media; money is but one form of 
currency. We speak of coin, greenbacks, and 
the like, as money. But the larger part of 
business is transacted through credit substi- 
tutes for these, — through drafts, bills of ex- 
change, negotiable notes, and the check and 
book-keeping devices of deposit banking. In 
their origin, it is probably true that all cur- 
rencies were composed solely of commodities, 
with a well-defined utility for other than cur- 
rency purposes. But with the development of 
society, the use of substitutes has increased. 
The bank customer thinks of his deposit in the 



DEMAND AND SUPPLY OF CURRENCY 159 

bank as money, and it really serves him all 
the purposes of money. The right to have the 
money when desired is as good as the actual 
possession of it, and is as readily and as ser- 
viceably transferred. When the bank customer 
wants to pay a bill, he draws a check or order 
against his account. The receiver of the check 
places it in the bank and gets credit for it, the 
drawer is charged with it, and the transaction is 
completed, no money having been transferred. 
These deposit accounts in banks commonly 
aggregate several times the cash resources of 
the banks. These cash resources also are 
largely made up of deposit claims against 
other banks. London, for exam^^le, is the 
banking centre not only for a large part of 
the business of England, but also for a con- 
siderable portion of the business of the world. 
International interest payments and the trans- 
actions of foreign exchange are effected by 
drafts on London. Balances between Lon- 
don banks are settled, not in money, but in 
checks and book-keeping at the Bank of Eng- 
land. It results that the enormous business 
of the London banks, aggregating hundreds of 
millions of dollars daily, requires the transfer 
of only a fraction of one per cent in money. 



160 ELEMENTARY ECONOMICS 

It becomes intelligible that the English people 
are able to handle their business affairs upon 
less than twenty dollars per capita of money, 
while France employs over forty dollars per 
capita, though doing a much smaller per capita 
of business. One rarely comes across a bank 
in French cities — deposit banking is scarcely 
practised, checks unknown in ordinary affairs, 
and even the Paris clearing-house, the only 
one in France, is scantily patronized. Work- 
ing people keep their salaries in their pockets ; 
peasants their savings in their stockings; and 
each merchant serves as his own banker. 

96. Not only have business men invented 
methods of convenience in doing business 
Government which in effect are creations of cur- 
issnes. rency, but governments and bank- 

ing institutions have made large issues of 
forms of money known as bills, bank-notes, 
"greenbacks," and the like. We have seen 
that all these substitute forms of currency per- 
form the functions of bullion currency (coin) 
in effecting exchanges, and therefore operate 
in this regard as would an actual increase in 
the supply of the commodity used as money. 



GEE SHAM'S LAW 161 



SUGGESTIVE QUESTIONS 

AVhen a merchant deposits in the bank, say $1000, is 
all of this usually in actual money? In what else? 

Suppose you have $1000 to your credit — on deposit, 
as it is called — at the bank, is this money really there? 

How much is probably at the bank to answer for your 
11000? 

If you desired to pay a bill, would you probably draw 
money or make a check ? 

'How could the merchant make the check serve him as 
money without ever seeing the real money for it ? 

What is a clearing-house? See a banker and ask him 
to explain it to you. 



GRESHAM'S LAW 
The Cheaper Money Drives out the Dearer 

As aluminum has become cheaper, what new uses 
have been found for it? 

What effect would a decrease in the exchange power 
of gold have on its use as plate and gilding and orna- 
ment? 

When a piece of gold in your possession will make 
for you a gold watch case or will buy you a second-grade 
bicycle, we will suppose that you choose the watch case ; 
now suppose prices change so that the gold will command 
a first-grade wheel — what change would you probably 
make in your application of the gold ? 

97. Any expansion of the currency, whether 
by credit or otherwise, tends to lower the pur- 
chasing power of each money unit (dollar, 



162 ELEMENTARY ECONOMICS 

franc, pound, etc.). This fall in the exchange 

power of the money commodity, for example 

gold or silver, makes it possible 

Poor money /. i t t i 

drives out lor the Commodity to be applied 
^°° ' to many new uses. So, as paper 

money or credit comes to circulate as cur- 
rency, there is some tendency toward disap- 
pearance from money uses of that part of the 
currency which can be used for somethi'ng 
else. The gold flows out into other chan- 
nels. So we say, in the terms of what is 
called Gresham's law, that the cheaper money 
drives out the dearer. But do not allow this 
expression to mislead you. The expansion 
of currency causes a fall in the purchasing 
power of the unit. This fall releases the 
gold or silver to the stronger pull of the 
outside market — the market of art and in- 
dustry. The dear money is not elbowed or 
pushed out, but rather induced or beckoned 
out. Cheaper money relaxes the currency de- 
mand, and thereby releases, in some measure, 
the currency which is the object of other kinds 
of demand. In truth, expansion by cheaper 
currency does not differ from expansion through 
an increased supply of the original currency 
commodity, except that, in the case of an 



GIIESHAM'S LAW 163 

addition of cheap money, all the outflow is 
confined to the dearer money, the cheaper 
continuing in its currency use. 

98. What we have already said as to Gresh- 
am's law^ applies in any society, and would be 
true were the society in question „ , . , 

•^ ^ Gresnam's law 

the only one in the world. But in international 

commonly these domestic tendencies 
are not of very great importance. Similar 
tendencies are, however, to be remarked in 
international trade. In domestic movements 
of currency, Gresham's law means that inflation 
(expansion or increase) makes some forms of 
currency more desirable outside of the cur- 
rency use than inside — more valuable for use 
than for exchange. In international affairs 
Gresham's law means that expansion makes 
some forms of currency more desirable outside 
of the country than inside — more desirable 
for buying abroad than for buying at home. 

Suppose, for example, that by some form of 
domestic expansion — for example, by paper 
money or by increased use of credit — prices 
have been raised ten per cent; that Avhich was 
originally 90 here and 100 abroad and was ex- 
ported, now rising to 99 here ceases to be 
exported; that which was 90 abroad and 100 



164 ELEMENTARY ECONOMICS 

here and was imported, now rising to 110 
here, is still more largely imported. That 
part of onr currency which stands best abroad, 
and upon which therefore the pull of the for- 
eign market is strongest, will be exported to 
pay the money balance which we come to owe 
abroad. This tendency toward the export of 
money will continue till we have cancelled 
the difference between domestic and foreign 
prices. While the export of our money tends 
to bring our prices down, 'the import to for- 
eign countries tends to raise the prices there. 
99. Let it be supposed, in further illustra- 
tion of international currency movements, that 
the money circulation of the United States is 
one billion five hundred millions, and that of 
Europe ten billions; suppose, also, our billion 
and a half to be all gold. If now an attempt 
be made to double our money volume by the 
issue of a billion and a half of paper dollars, 
it is evident that our prices will tend to rise. 
The result must be an increase in imports and 
a decrease in exports. As long as we have the 
gold to send, our unfavorable trade balance 
will be settled in exported gold, and prices 
will tend to rise abroad. When interna- 
tional prices have reached their new level, the 



GRE SHAM'S LAW 165 

case will stand as follows : the aggregate cur- 
rency of Europe and America will have 
increased from 111,500,000,000 to 113,000,- 
000,000, and a general advance in prices of 
13 % will therefore have taken place. Our 
currency must, then, have increased from 
$1,500,000,000 to (11,500,000,000 x 1.13) |1,- 
669,500,000, —$169,500,000 of this being gold, 
and the remainder of our gold having left to 
swell the circulation of Europe. 

An issue of two billions of paper by us 
would give the following outcome: all our 
gold would have departed for Europe; rise of 
prices in Europe of 15%; our need for money 
on this new gold basis, 11,725,000,000; our 
actual circulation, $2,000,000,000; gold at pre- 
mium of 15.9%; rise in prices as reckoned in 
paper money, 33%. 

100. Bearing these facts in mind, the futility 
and danger of any local effort toward an in- 
creased currency becomes evident. Attempts of 
this sort can attain their purpose only in propor- 
tion as the currency of the world is expanded, 
unless the currency of the nation attempting 
expansion wholly loses its commodity elements 
— e.g. gold — and becomes a non-international 
currency — e.g. fiat (irredeemable paper). 



166 ELEMENT ABT ECONOMICS 



SUGGESTIVE QUESTIONS 

Is it possible permanently to have exports exceed im- 
ports ? 

What effect on the volume of money abroad? On the 
volume of money here? 

What effect on prices abroad? On prices here? 

What effect on further exports ? 

What ultimate effect on exports must follow from the 
prohibition of imports ? 

Is it worth while to increase the domestic currency 
and to expand prices by restricting purchases, unless 
we expect later to increase our purchases? 

What has this to do with protective tariffs ? 

Is it true of nations that international division of 
labor is possible only on condition of possible exchange 
of products ? 

Is division of labor well for people inside the same 
country ? 

Is international division of labor well? 

Do you see any bearing of Gresham's law upon the 
silver question? 

In a commodity currency, where does the supply come 
from? 

What would measure value if the legislature fixed the 
supply, for example in paper ? 

Would paper or commodity currency best adapt itself 
to demand? 

Would an increased use of silver as money set free 
any gold for commodity uses? Why? 

How would the value of gold as commodity be af- 
fected? 

How would its purchasing power as money be 
affected? 



COMMERCIAL CBISES 167 

Would its purchasing power as money fall, unless its 
value as commodity fell also ? Why ? 

Is the purchasing power of gold as money given to it 
by the fact that it is stamped by the government? 

Does its purchasing power result in any degree from 
the fact that it is used as money ? 

May its use as money be effective in this regard, 
though the government stamp is not effective? 

Is it true that the stamped coin is worth exactly the 
value of its contained bullion ? 

If the stamp does no more than certify the weight and 
fineness, who pays for the stamping? 

What is seigniorage ? 

COMMERCIAL CRISES 

What kind of years generally precede panic times, as 
to (a) prices, (b) wages, (c) speculations? 

AVhat kind as to the creation of (a) capital, (b) the 
building of houses, (c) of factories, {d) of railroads ? 

Have the people been mostly at work, or have large 
numbers been unemployed ? 

Has the social product been large? 

How about savings ? 

If prices have been high and business large, what 
must have been true as to the volume of currency ? 

Has the volume of money increased? 

Are flush times times of relatively large production of 
the precious metals or times of unusually marked tendency 
toward the coinage of accumulated stocks of precious 
metals ? 

How did these high prices become possible ? 

101. We have already seen that a large 
share of modern business is transacted through 



168 ELEMENTARY ECONOMICS 

the use not of money, but of substitutes for 
money — through different forms of circulat- 

The great ^^^S Credit, Or through the book- 

credit system, keeping devices of deposit banks 
and clearing-houses. In local trade, checks 
supply a large part of the currency demand. 
Drafts and bills are the media of debt payment, 
not only between city and city, but between 
country and country. Only balances are paid 
in money, and the clearing-house greatly re- 
duces this latter employment. Bank balances 
in London are paid by book-keeping in the Bank 
of England. It is evident that all exchanges 
completed without the use of money stand 
with relation to the demand for money as if 
they had not taken place. Not only this, but 
more rapid transportation has shortened the 
time of employment of money in the payment 
of balances. These influences together have 
worked powerfully to lessen, if not to cancel, 
the tendency toward appreciation in the cur- 
rency unit, due to enlarged demand for ex- 
change media. The customer pays the retail 
trader by check. The retailer pays the whole- 
saler by draft. Railways and telegraphs have 
almost cancelled the element of distance in 
book-keeping and payment relations between 



COMMERCIAL CBISES 169 

communities. Negotiable notes, bills of ex- 
change, open accounts of debt and credit, all 
contribute to the economy of money. In 
England and America the credit system is 
widespread, thoroughly organized, delicately 
adjusted, swift, effective, and complicated. 
It is carefully protected by guaranty or- 
ganizations, by great trust companies, by 
all-powerful and all-inquisitorial mercantile 
reporting and collection agencies. In ad- 
dition to these, there are the investment 
companies, the savings banks, and the insur- 
ance companies, all of which are intermedi- 
aries for the gathering and distributing of 
credit. Their business is to guard the credit 
system with extreme watchfulness in protec- 
tion of their legal guaranties. Thus the credit 
system, resting upon infinitely intricate rela- 
tions between manufacturers, jobbers, whole- 
salers, retailers, and consumers, has for super- 
structure the many-storied fabric of deposit 
and discount banking, of stock investment and 
collateral borrowing, of savings and insurance 
investment, and of trust and mortgage guar- 
anty companies. There are even companies 
to guarantee the validity of titles and the good 
faith of employees. 



170 ELEMENTARY ECONOMICS 

102. Not all of these credit devices serve as 
economies in tlie use of money. Where items 
in open account offset each other, the economy 
is manifest. Where credit circulates, the econ- 
omy is manifest. But the mere granting of 
credit, awaiting a later settlement, does not 
lessen, in the outcome, the demand for mone^^, 
but merely postpones it. Credit must be used 
by transfer in payment of indebtedness before 
it works as substitute for money. Neverthe- 
less, this non-currency element in credit is 
none the less credit, and in the making up of 
disaster is as important as any other. For, 
carefully inspected and supported as is this 
credit system, it is the sheerest card-house. 
Its contrivances for watchfulness and safety 
are its most shifty and unstable features. No 
fire-trap could be more skilfully planned for 
purposes of destruction, with heavy supports 
and girders of spontaneously combustible 
timber. 

103. The period preceding a financial crisis 
is commonly a period of seemingly great jdtos- 
, , . perity. There is a popular impres- 

Ante-panic . 

years are pros- siou that sucli prosperity is a mere 

seeming, and that panic is in the 

nature of a necessary collapse. It would be 



COMMERCIAL CBISES 171 

going too far to claim that no bubbles are 
formed in the course of business expansion, 
or that these bubbles are not sources of finan- 
cial danger; but, speaking generally, the pop- 
ular impression is a mistaken one. The years 
preceding a panic constitute a period of great 
industrial activity and of great productiveness. 
Wage-earners have been well employed; the 
industries of distribution have been in smooth 
and successful operation. At the close of the 
period it will be found that the wage-earning 
classes have rarely been as well housed, as well 
clothed, or as well fed. They are exception- 
ally well supplied with the smaller conven- 
iences and comforts of life. Measured by 
their own standard, the laborers are prosperous 
in pleasant homes and large personal belong- 
ings. In the aggregate, they represent a large 
total of material wealth. It will be found true 
of the farmer that his farm was never under 
better cultivation, or his herds larger, his 
buildings more substantial or in better repair, 
or his home better furnished. Likewise of the 
manufacturer and the merchant; never were 
there larger stocks or more warehouses burst- 
ing with merchandise. Never were factories 
daily pouring forth more goods. Turning to 



172 ELEMENT ATiY ECONOMICS 

general conditions, it will be found that these 
prosperous years have rebuilt cities in brick, 
interlaced states and even continents with 
railroads, dotted the prairies with farmhouses, 
beautified them with fields of grain, and 
covered them with herds. The period has 
been one of widespread plenty, of remarkable 
industrial activity and efficiency, of boundless 
energy and hope. It is strange, it is even 
impossible, that extensive building operations 
should, in themselves, result in houseless ex- 
posure; that overflowing granaries and fatten- 
ing herds should foster hunger, or that ware- 
houses of cloths should be the sufficient cause 
of nakedness. It is doubtless true that these 
meshes of railroads, these cities of brick and 
iron, these immense factories and fattening 
herds, are largely the outcome of reckless hope 
and borrowed capital ; yet it all counts in the 
world as wealth; it is here. That the capital 
is borrowed chips nothing from this fact. 

104. The elements of danger are not to be 
found in the industrial situation, which was 
Where is the possibly never before so prosperous 
difficulty? in thorough efficiency and organiza- 
tion. The difficulty is financial. 

We have seen that the volume of exchanges 



COMMERCIAL CRISES 173 

is the measure of the demand for currency; 
double the volume of currency without increas- 
ing the number of exchanges, and you double 
prices. To halve the currency is to lower 
prices approximately in the same ratio. These 
propositions are unquestionable; they hardly 
reach the dignity of principles — they are mere 
mathematics. Yet, strangely enough, as ap- 
plied to the facts of industry they are seemingly 
untrue. Prices almost uniformly rise with in- 
creasing activity in business, and fall with 
failing business. This is apparently to say 
that the value of currency falls with an in- 
creased demand, and rises with a failure of 
demand. 

The explanation is found in the fact that, 
with expanding business, the currency also 
expands, and, commonly, in a degree more than 
proportionate to the demand for it. This in- 
crease takes place not ordinarily in the legal 
tender element, but in the credit element. 
Reviving credit always characterizes reviving 
business. Under existing systems, credit fur- 
nishes for currency the only element of ready 
adaptability. It furnishes, for ordinary con- 
ditions, the guaranty of steady market prices. 
It avoids an enormous application of human 



174 ELEMENTARY ECONOMICS 

energies to the production of commodity cur- 
rency. Without it, great expanding business 
operations would carry with them their own 
veto in falling prices and vanishing profits. 

But these advantages are purchased at the 
risk of enormous dangers. The commercial 
crisis marks the period when money takes on 
abnormal scarcity and abnormal value from the 
fact that money substitutes — credit currency 
— contract in volume. The very height of the 
credit fabric measures the disaster of its fall. 
It is at the full tide of prosperity that the 
danger is greatest. If, then, for any reason, 
whether of extravagance at some point, or of 
over-production in some industries, or of fail- 
ure of harvests in some districts, or of over- 
speculation, or even of business prosperity 
carried to the point of over-stringency in the 
loan market, there sets in a contraction of 
credit, trouble begins. The debtor can pay 
only by calling in turn ■ upon his debtor. The 
pressure for payment increases in almost geo- 
metrical progression. Not only does credit 
largely disappear from circulation, but the 
burden of liquidating existing indebtedness is 
thrown upon the legal tender and the un- 
questioned elements of the currency. Panic- 



COMMERCIAL CIUSES 175 

stricken marketings of commodities, and 
panic-stricken or speculative withdrawals of 
money from the channels of business further 
complicate the situation. Endless ruin and 
disaster follow; prices tumble; this is panic, 
when even the rich seem poor, when business is 
stagnant, exchanges are suspended, laborers are 
unemployed and in want. Immediately preced- 
ing it were the headlong rush and exultant 
activity of prosperity, — when all men were 
hard at work, though doubtless over-confident, 
and possibly over-venturesome. And now fol- 
lows the destruction of wealth. In the course 
of ample credit, things had arranged themselves 
in the hands of those who knew best how to 
use them. Now ensues an enforced redistri- 
bution. In the outcome one man finds him- 
self with two houses, and can use but one; 
or with two horses, and needs but one; and 
with endless steam engines, and trumpery, and 
stocks in trade of which he wants nothing. He 
can only let the property grow old or rot or 
rust. The wheels of the factory stand still; 
industry has dropped its tools: and all this, 
not because there was too little wealth, or too 
much, but because what there was, was badly 
arranged to withstand a flurry in credit. 



176 ELEMENT ABY ECONOMICS 

105. It is clear enough that panic is an ebb 
in credit, and that in proportion as the inter- 
mixture of credit in currency is 

Advantages, _ _ ■^ 

disadvantages, large, is the disaster great. What- 

and remedies. i ,i t , • 

ever may be the ameliorations possi- 
ble, the gravity of the case is not to be ques- 
tioned. Here is the most noticeably weak 
point in the modern competitive system. Any- 
thing which shall offer a reasonable hope of 
displacing credit from its enormous develop- 
ment in modern business can hardly be other 
than a good fortune. The money of ultimate 
redemption is too small for the credit fabric 
built upon it. It is like a cone resting on its 
apex. This delicate and unstable equilibrium 
is a condition fraught with constant danger. 

Doubtless so long as credit works, it affords 
desirable economies in the use of bullion cur- 
rency and, in some measure, steadies prices. 
England succeeds in managing a much larger 
per capita volume of business than does France, 
and with a much lower per capita supply of 
bullion currency. But periodically, England 
suffers acutely from the commercial crisis, 
while France is relatively exempt. The losses 
probably outweigh the gains. 

106. That which most naturally suggests 



COMMERCIAL CRISES 177 

itself as a remedy, is to enlarge the currency 
basis, —to declare that more money j^ expansion a 
of ultimate redemption is needed; remedy? 
therefore start the printing presses or coin silver. 
But remember that it is the shape of the pyra- 
mid, and not the size of it, which is matter of 
concern. Unless there is found to be some tend- 
ency in silver coinage, or in any other form of 
expansion, to lessen the volume of credit rela- 
tively to money, the inflation argument fails. 

There is no such tendency. Silver expan- 
sion, or any other expansion, would be followed 
by a rise in prices proportionate 

, , , . , Silver coinage. 

to the expansion, ihe degree in 
which credit circulates depends upon the 
methods of business and the organization of 
industry, and not upon the kind of money. So 
long as manufacturers find it advantageous to 
borrow capital, so long as wholesalers take 
credit from manufacturers, retailers from 
wholesalers, customers from retailers, and all 
deposit their funds in banks and pay through 
checks and book-keeping, so long must the 
intermixture of credit remain an element of 
danger. In truth, the very bulkiness of silver 
would, in itself, tend somewhat to increase 
the inducements to deposit methods. 



178 ELEMENTABY ECONOMICS 

Nor is there any great hope that these credit 
methods will cease because of their dangers. 
The advantages and convenience to the indi- 
vidual business man are too pronounced. Here, 
again, individual interests are not parallel with 
the general interest. No one business man 
could afford to stop unless all should stop, and 
each would gain by violating the rule intended 
for all. The remedy, if any is possible, lies in 
the discovery of a currency effectively flexible 
in time of need. 

QUESTIONS 

Would it prevent panic if money were all gold ? Or 
diamonds ? 

Do you see any way to prevent the granting of credit, 
or the use of credit as currency ? 



CHAPTER XII 

THE COMPETITIVE SYSTEM 

107. Every year important discoveries are 
made in science, and important improvements 
and inventions are perfected in industry. The 
great advance which has been accomplished 
does not so mnch indicate that progress must 
soon cease, as that progress is, by the very 
nature of things, unlimited. It is, indeed, only 
when we come to examine human institutions, 
habits, laws, and customs, that we meet the 
widespread conviction that no progress is in 
store for the race. One man is jg ^-^^^.^ ^^^^ 
sceptical of progress because he ^°^ P^°s^^ss ■ 
believes that in a divinely ordered universe all 
things are for the best; to assert that what- 
ever is is right, seems to him to imply that 
w^hatever is not is wrong. Existing conditions 
therefore appeal to him as the best. He trusts 
and is content. A second man believes in 
natural law. He insists that it is ^^^ ^^^ 3^^,^ 
useless to run counter to the nature anything? 
of things. The suns blaze, the stars roll, the 
179 



180 ELEMENTARY ECONOMICS 

earth revolves, the tides flow, light and dark 
succeed each other, the winds destroy or save 
— and what can man do ? He is a mere spec- 
tator. Set over against the universe and its 
power, he is merely as is an insect; studied in 
the light of science, he is the mere product of 
his surroundings, like mould or scum; setting 
himself to strive against the laws of the uni- 
verse, he is the self-deluded maker of empty 
motions. Whether things are best as they are 
or not, they are as they are, and will remain so. 
Do not meddle, let things pass as they must — 
laissez faire^ laissez passer. 

108. There is a third point of view, some- 
what like the others, but with more of truth 

Can men change ^^^ '^^' Thinkers of this third SOrt 

themselves? know that man can do much, as he 
has already done something, in adapting to his 
needs the world in which he lives, and in sub- 
jecting its forces to his service. He has tun- 
nelled mountains, hollowed mines, dredged 
rivers, reared dikes, spanned canons, cleared 
forests, and planted them anew. Steam and 
gravitation, Avind and tide, are harnessed to his 
tasks. There is no problem which nature sets 
for man, no difficulty with which it confronts 
him, that man need fear to meet. But of the 



THE COMPETITIVE SYSTEM 181 

problems which human nature and human char- 
acter present, let him beware. Man has not 
made himself, nor can remake. No one can lift 
himself by pulling at his boot-straps, nor can 
any man add one cubit to his stature. In mat- 
ters of human nature and human society men 
are not directors and governors, but mere ob- 
servers. Man as he is, men as they are, these, 
they say, are a fixed term, ■ — the known quan- 
tity in the equation of human life. In the 
years, or the centuries, human nature may be 
changed, but it cannot change itself. Where 
any social problem demands for its solution 
another human nature or a new species of 
human beings, it is as well to drop the problem 
as insoluble. If the reformers' new millennium 
awaits a regenerated humanity, the millennium 
must be a weary distance ahead. 

109. There is a trace of truth in each of these 
views. It is clear enough that, as related to 
man's environment, man is a force. 

. Man is a force. 

Assume, if you will, that he is the 
product of his environment. He is not there- 
fore necessarily inert and like a mere puppet of 
the energies surrounding him. He may co- 
operate or he may resist, just as children may 
serve their parents or rebel. All talk about 



182 ELEMENTARY ECONOMICS 

natural laws and social laws which fails to 
take account of man as a force, or which regards 
his share in the social on-going of things as 
irrational or ineffective or unnatural, is a gross 
perversion of both language and thought. In 
the large view there are no unnatural things. 
The sober common sense of mankind repudiates 
the lazy optimism which denies all room for 
progress, even as it condemns the lazy self-dis- 
trust which concedes the need but despairs of 
the remedy. Why should men search and 
study and strive, if they are mere observers, 
and there cannot possibly come any result of it 
all ? Science, even, is good for something only 
when it is good for something. 

110. But notice that the thinkers of the 
third class do not precisely assert the hopeless- 
ness or futility of all human effort, 

Men are forces 

as related to but Only the helplessness of hu- 
eac ot er. manity in face of the difficulties and 
perplexities which human nature and human 
character themselves present. But even this 
much is not true. Just how we are not able to 
see, yet somehow each of us is conscious of a 
power Avithin himself of self-mastery, self-help, 
and self-improvement. But even were this 
consciousness a self-delusion, there remains to 



THE COMPETITIVE SYSTEM 183 

man tlie power of one individual over another, 
since in relation to each individual his fellows 
are a part of his environment. The human race 
is not a great indivisible unit, but a group 
made up of distinct and separate units. One 
can do something of good or ill in his relations 
to his neighbor. Societies make laws, punish 
criminals, and foster education. It is in the 
power of each man to spread vice or virtue or 
microbes. To deny this is to deny that good 
and evil, esteem or condemnation, have any 
place in human affairs. Society contains Avithin 
itself the forces which may work for itself help 
or harm. On any other terms the study of 
society would be a fruitless exercise, the mak- 
ing of laws a simple farce, the clash of armies 
an empty parade, courts a sheer mummery, 
police and fire departments a silly waste. 

Thus, as we come to examine the present 
social system as a whole, or the different aspects 
of it in detail, we need to guard ourselves from 
any kind of prejudgment or from ready-made 
conclusions of any sort. 

111. Not a few earnest and capable people 
regard the present industrial system as in- 
trinsically and irremediably bad. The private 
ownership of property and free competition in 



184 ELEMENTARY ECONOMICS 

business are the leading characteristics of the 
existing social order. The critics of our pres- 
Private prop- ©nt social system deny the justifi- 
erty and free ability of the private ownership of 

competitioa -^ ^ 

attacked. property; they insist that free com- 

petition is merely another term for chronic in- 
dustrial warfare; that business has become a 
bitterly cruel struggle for existence — a system 
productive of antagonisms and destructive of 
kindliness, where each is set to gain by his 
neighbor's loss. It is, therefore, believed that 
social safety can be found only in a system 
which shall make men common owners in the 
means of production, and conscious co-operators 
in the business of producing. By making all 
interests common and general, it is thought 
possible to avoid the wastes of competition and 
to still the hates and rivalries of self-interest. 

112. Stated thus broadly, the proposal of the 
socialists is an attractive one. It purports to 
Is there a ^^^^ upon the brotlicrhood of man, to 
defence? substitute unsclfishness for rivalry 

and distrust, to make all men equal partners in 
the general welfare.^ But this programme will 

1 This discussion must not be understood to cover all aspects 
of socialism or all schools of socialistic thinking. Not all social- 
ists expect or desire to do away with rivalry and antagonism ; 
not all insist upon the equal partnership principle ; not all give 



THE COMPETITIVE SYSTEM 185 

not bear clpse examination. It is like those 
large paintings wliose distant beauty changes 
to danb on near approach. In the first place, 
we observe that the rivalries and antagonisms 
of competition have not resulted from legisla- 
tion or agreement or any sort of compulsion. 
They have not followed from any conscious 
purpose or artificial arrangement. Competi- 
tion and contest have not been enacted. They 
seem certain to establish themselves unless so- 
ciety consciously interferes to prevent. That 
is to say, if all men, as men exist to-day, are to 
work together in a scheme of brotherly love 
and co-operation, and under some sort of wide- 
spread, common ownership of capital and prod- 
uct, they will have to be compelled thereto by 
force. The other system is the system of free- 
dom. Socialism is the system of compulsion. 

113. On the side of the existing system it is 
also to be urged that there is, in fact, obscurely 
present in it a very large element of co-ojDcra- 

much weight to the brotherhood of man as the basis of social 
organization ; not all look to state compulsion as fundamental 
to the social structure. Obviously, however, it is possible for 
us to examine only the more typical ideas and tlie characteristic 
traits of socialism as presented by the main body of socialistic 
thinkers. Almost all agree upon the necessity of the ow^ner- 
ship and operation by society of all land and capital, with some 
manner of joint ownership of the product under some not very 
specific way of sharing it. 



186 ELEMENTARY ECONOMICS 

tioii, and this, co-operation of a purely yoI- 
Present system untary character. The great stock 
sciousCopera- corporations, like railroads, banks, 
*^o^' and manufactories, the hre and life 

insurance organizations and the great secret 
benevolent orders, all point to a growing spirit 
of association and co-operation in modern soci- 
ety which seeks no aid from compulsion. 

114. Not only this, but the present system, 
whatever it may be in purpose, is in effect an 
It is almost automatic system of voluntary co- 
scilTs^L^o''pra- operation. Where division of labor 
*i°^' exists, each man must, by some sort 

of exchange, share his products with his fel- 
lows. Division of labor means a mutual inter- 
dependence of producers. Exchange of goods 
takes place for the common benefit ; both buyer 
and seller must believe themselves to be bene- 
fited by trading, or they will not trade. It is 
true that each is trying to get the greatest pos- 
sible benefit for himself, but neither can reap 
the whole of it. Each must, in some measure, 
furnish a help to the other. It is not true that 
one man necessarily or commonly gains by trade 
at another's loss. Nor, indeed, is it true that 
the rivalries of competition are necessarily or 
commonly harsh conflicts of interest in which 



THE COMPETITIVE SYSTEM 187 

the well-beingf of one is set over aofainst the sue- 
cess and prosperity of his neighbors. True, each 
is trying to undersell the other — to get the 
trade, to gain the market, and to control it — 
at the expense or even at the ruin of his rival. 
This, however, proves, not that competition is 
a rivalry between each member of society and 
society as a whole, but only that it is a rivalry 
between competing producers. It is a co- 
operation between each competitor and society. 
When one producer or seller prospers as 
against another, it is by offering society the 
better product or the lower price. ^ Viewed 
therefore from the point of view of society, 
competition is a rivalry in offering most for 
least, — a contest in the rendering of largest 
service, a war in well-doing — where success is 
declared to the largest benefactor. 

Trade, then, is a form of co-operation — 
unconscious, it is true, but voluntary and effec- 
tive. The East Indian laborer is not aware 
that in result he works in order that an Ameri- 
can laborer may consume, nor does the iron 
miner in England realize that it is the demand 



1 This statement must not be taken as without important 
exceptions. Speculation, shoddy, advertising, and trickery are 
not yet well controlled in the competitive system. 



188 ELEMENTARY ECONOMICS 

of Australia which affords him employment. 
But it may none the less be true. World- 
wide competition has brought about world-wide 
interdependence and co-operation. The indus- 
trial brotherhood of man has already come. 

Thus, the charge that competition is mere 
conflict will not hold as a ground of criticism 
of the present social order. Socialism does not 
in this respect make good its case. But sup- 
pose now that, for a moment, we put socialism 
upon the defensive. 

115. Men now work under the incentive of 
want, incited and persuaded to effort by their 
^,„ , interest in themselves and in those 

Will man work 

without self- dependent upon them, — wives, chil- 

interest? ^ i , • tp'itii 

dren, relatives, anairienas. Incluae 
all this activity under the head of selfishness, 
though the term seems, in some measure, an 
inapt one. But how insure that men shall work 
strenuously, that society shall consume the 
largest practicable amount of wealth, if for that 
which we call selfishness there is substituted 
an interest in the nation or a love of humanity 
in general ? It will not remove the difficulty 
to show that the interest of each is at one with 
the interest of all. How shall any one find 
strenuous effort to be for his own interest? 



THE COMPETITIVE SYSTEM 189 

In America, for example, if he is able to per- 
suade himself to work twice as hard and to 
produce twice as much, his own share will be 
increased thereby by one seventy-millionth. 
Brother-love will not stand this strain. 

The difficulty with the socialistic scheme of 
things is that it does not take full account of 
man as he is. Nothing will take the place 
of interest in self or family as a motive for 
effort; neither fear nor love of society in gen- 
eral nor any mixture of fear and love will 
stand the test. Slavery shows the insufficiency 
of fear; the experience of the Pilgrims and 
of the early Virginia colonists illustrates the 
ineffectiveness of the motive of indirect self- 
interest. 

Roscher puts the case forcibly as follows : — 

When Louis Blanc and Mably rely iipon the sentiment 
of honour instead of personal interest as the spur of pro- 
duction and the rein of consumption, and in respect to 
effectiveness instance the army code of honour, they 
forget, among other things, the thirty cases of capital 
punishment provided in the military code. , . . Were 
all burdens and pleasures of life equally distributed under 
strict communism, and distributed equally, in line with 
the concepts of the masses, men like Thaer, Arkwright, 
and others, who now in library and laboratory produce 
food for hundreds of thousands, would produce with 
mattock and shovel, at the highest, enough for three or 



190 ELEMENTARY ECONOMICS 

four men only. . . . General and equal popular educa- 
tion as the communists demand it would practically work 
out at this merely — that no one would attain to the 
higher scientific development. ... "In place of the cur- 
rent competition to produce the most and the best possible, 
there would come about under socialism a competition as 
to who could produce least and worst." . . . When the 
first Virginia settlers in 1611 abandoned the system of 
communistic labour and joint-stock methods, it came 
about immediately that in one day there was as much 
accomplished as before in a week, three labourers pro- 
ducing as much as thirty did before. Even in E'ew 
England, among strong men accustomed to labour, who 
had made so great sacrifices in the interest of their faith, 
communism was attended with continual famine; this 
changed only in 1623, when private property was estab- 
lished. — RoscHER, translated from System der Volkswiri- 
schaftj Book II. 



CHAPTER XIII 

POPULATION, EENT, AND SOCIALISM 

116. Socialists and other critics of the com- 
petitive system assert that the outlook of society 
as at present orp-anized is hopeless ^ 

^ o -^ Is every uncom- 

— that adopting the reasonings of fortable doc- 
the current political economy the 

lot of the race must become increasingly hard. 
It is somehow inferred that the fault is rather 
with the present social system than with the 
theories upon which the conclusions rest, or 
than Avith the fixed facts of the world in which 
we live. In fact the socialists instead of 
quarrelling with many of the established eco- 
nomic theories assume the correctness of them 

— including some which have been abandoned. 
At the same time they have perfect confidence 
that the human environment is sufficient for a 
happy human destin}^ and that in fact the ul- 
timate destiny of the race Avill be a happy one. 
Therefore they reason that if the current eco- 
nomic doctrines point to dismal conditions in 

191 



192 ELEMENT ABY ECONOMICS 

the future, the fault must lie in the social 
system. 

But there are two assumptions here, neither 
of which is free from doubt: (1) the correct- 
ness of the current economic dogmas ; (2) the 
possibility of a generously prosperous life for 
the race with the environment as it exists. 

We must therefore determine how much of 
truth is contained in these assumptions. In 
what measure is the human outlook a hopeful 
one ? Of what value are our economic doctrines 
for purposes of prophecy? Are there any ten- 
dencies in human life which need render the 
student despondent of the future ? 

117. When the pioneer enters upon a new 
continent, with its wealth of new resources, its 
DiminisMBff expanse of unexhausted lands, its 
returns again, gtore of uucarcd-for fruits, its teem- 
ing animal life for sport and food, he may well 
hope for himself a life of ease and plenty. 
Nature appears to be generous far beyond his 
needs. The wide ranges of land do not, it is 
true, offer unlimited opportunities and boun- 
ties, but in comparison with his necessities the 
supply far outruns the need. 

And yet in truth the life of the pioneer is a 
long way removed from ease and lack of care. 



POPULATION, RENT, AND SOCIALISE! 193 

Food is easily obtained, but only for a part of 
the year. Harvesting and storage are to be 
provided for; shelter must be had, clothing 
must be fashioned. Even if the chase could 
satisfy the need for food and raiment, as for 
civilized man it never can, there will remain 
the need of hunting appliances and of powder 
and ball. No man is sufficient for his own 
necessities in any adequate measure. Fortu- 
nately for humanity, men are in great measure 
dependent upon each other. We must live 
among our fellows or we must suffer. Too 
sparsely inhabited countries are never prosper- 
ous. The planting of a colony is a difficult 
and hazardous undertaking, as the early his- 
tory of America testifies. 

Yet it is true that new countries do com- 
monly offer favorable conditions as far as food 
and raw materials are concerned. The insuffi- 
ciency is in the products of machines and mines 
and factories — in the commodities which de- 
pend for their production largely upon human 
association. 

But as the new continent becomes more 
thickly populated, the advantages of cheap food 
tend to disappear. The gathering of wild prod- 
ucts gives place to cultivation; stock-farming 



194 ELEMENTARY ECONOMICS 

is substituted for the chase. Pastures must be 
fenced; winter food must be provided for the 
stock. Land is no longer to be had for the 
taking; rents are charged. 

We are again face to face with the old fact, 
or, as we call it, the old law of diminishing 
returns. After a certain early stage is passed, 
it becomes more and more difficult, as popula- 
tion grows more and more dense, to obtain a 
living from the land. Rent is, indeed, as we 
have already seen, the index of increasing 
resistance to the increase of agricultural prod- 
ucts — the measure of the extent to which 
cultivation has been pushed to lands of lower 
productive capacity. 

In view of the fact that the population of 
the world is rapidly increasing, this law of 
diminishing returns has been shown to have 
disquieting implications. Recalling also the 
tendency, manifested by all forms of life lower 
than the human, to multiply as far as food, ene- 
mies, and climate will permit, we come in view 
of the evidence from which Malthus inferred 
that the human race tends strongly to over- 
population. If over-population is inevitable, it 
seems likewise inevitable that the human race 
must one day meet the barrier of starvation. 



POPULATION, RENT, AND SOCIALISE 195 

Malthus' dismal forecast is to be questioned, 
if at all, not on the doctrine that over-po^^u- 
lation means poverty — for this is not open 
to question — but on the doctrine that over- 
population is in fact inevitable. 

118. Some short discussion has been had 
(Sections 74-78) of the degree in which the 
Malthusian forecast demands ac- is Malthus to be 

, X 1 i. J.1 condemned, or 

ceptance; now note what use the the economists, 
socialist makes of the Malthusian ^' ^^^ '^ompeti- 

tive system, or 

doctrine. He attempts no condera- the facts? 
nation of the economists generally, as if they 
were to be held responsible for the facts 
which they declare. All men must know, 
even though some seem sometimes to forget, 
that the economists have not fixed and es- 
tablished the grain-bearing capacity of the 
fields. The messenger who brings bad news 
does not deserve to be choked therefor, nor is 
the doctor to be hated because of his unfavor- 
able diagnosis; even an undertaker may be a 
kind-hearted, worthy citizen. Instead of con- 
demning the economists, the socialist condemns 
the present industrial system. This, however, 
is not much more reasonable. The present 
economic order is likewise not responsible for 
the nature of the land or for the facts of agri- 



196 ELEMENTARY ECONOMICS 

culture, nor would changing the system alter 
the facts. Under socialism, as well as under 
the present system, twenty men cultivating 
one acre of land would find it exceedingly 
difficult to make a living. 

If the socialist regards the outcome of over- 
population as a serious one under the present 
social system, there is still no use in changing 
to socialism unless socialism would somehow 
help the case. Children now and then get 
angry and break things out of petulant im- 
patience. But this is childish. It is best 
never to take medicine unless one knows what 
it is for, and what effect is likely to come of it. 
Where, as under socialism, the community as a 
whole takes the burden of seeing every family 
well provided for, the tendencies toward over- 
population would probably not be less, and the 
land would be no better.^ 

The law of diminishing returns is a mere fact 
with which every farmer shows himself familiar 
in failing to reduce his field from twenty acres 
to one and to apply all his labor and fertilizers 
upon that one acre. Neither the human race nor 
the social system can remedy this agricultural 

1 One ought in fairness to add that there are socialists who 
maintain that a socialized community can control the growth 
of population as an individualistic community never can. 



POPULATION, BENT, AND SOCIALISM 197 

fact, nor is any economic theory or theorist to be 
charged with responsibility for it. The human 
race is not able to make its environment to its 
liking. Over-population may be far off ; better 
knowledge of chemistry in its application to 
farming, better choice of products, or better 
varieties of products, or even the cultivation of 
products now unknown, may for a long time 
hold in check the harsh pressure of want. But 
population cannot endlessly multiply, without 
at some point meeting with resistance in les- 
sened supplies of food products and of the raw 
materials of industry. 

119. But while the human environment lacks 
in adaptability, there is (as we saw in Section 
6) a large measure of adaptability i^^creasing 
in man. In science, in art, in pro- returns again, 
cesses, and in appliances, progress is continu- 
ous. A pioneer population as it increases in 
numbers finds that new methods of production 
become possible. Division of labor, which 
means the specialization of employments, 
becomes practicable. With a large market, 
economies in production become possible. 
With still larger markets the use of machinery 
is practicable. With increasing population 
improved methods of transportation become 



198 ELEMENTARY ECONOMICS 

profitable, and manufacturing centres are estab- 
lished to buy and sell over a wide territory. 
The economies of the great factory system fol- 
low — the use of expensive machinery, the ad- 
vantages of great steam- or water-powers, the 
gains of scientific oversight, and of salaried 
designing and inventing. Thus, with increas- 
ing population and widening markets the field 
of opportunity enlarges for invention and im- 
provement. There was no room for great fac- 
tories with their machinery and complicated 
processes, until, with increasing population, 
human ingenuity had placed at man's disposal 
the modern methods of transportation. It is 
true that cause and effect are hard to distin- 
guish here. There is a complex interplay and 
reaction, all things moving forward by the aid 
of each and for the aid of all. 

But all this progress in invention, transpor- 
tation, and trade is human progress. It belongs 
to the economic factor, man. There is then a 
law of increasing returns for the human side 
of the case as well as a law of diminishing 
returns for the environment. It is possibly 
true ■ — indeed it is probable — that the advan- 
tages of division of labor and of larger factory 
plants are even now approaching the limit of 



POPULATION, BENT, AND SOCIALISM 199 

increase. But the advance of mankind in sci- 
ence, art, skill, processes, methods, tastes, and 
desires, is not subject to limitation. On this 
side there is really a law of increasing returns. 

So, even if it grows more difficult to obtain 
the necessary supply of raw materials from the 
earth, there may be, we repeat, at the same 
time an increasing share of productive energy 
which can be applied for this purpose. The 
human race will not necessarily be the worse 
off in the end. 

It is, then, evident that too much may be 
inferred in the way of evil forecast from the 
tendencies known as the Ricardian Law of 
Rent and the Malthusian Law of Population. 
At any rate, to call these tendencies laws does 
not make them subject to repeal through social- 
ism, or justify condemnation of the present 
economic system as if it had enacted them. 

Remember, however, that to reject socialism 
as a general remedy for all social ills is not to 
deny that there are real evils in modern society. 
It is merely to assert that these evils must be 
considered and treated as distinct problems 
rather than as one great problem awaiting one 
sweeping solution. The social question is in 
truth a cluster of questions. 



200 ELEMENTARY ECONOMICS 



SUGGESTIVE QUESTIONS 

How would socialism affect inventions, new processes, 
the progress of science ? 

What effect on literature, history, poetry, philosophy, 
etc.? 

On the per capita production of the mere necessities 
of life? 

Are there immaterial goods? Give illustrations. 

Suppose several men to have worked together in dig- 
ging a ditch : when the pay is to be divided should the 
shares be equal ? Or according to the size of families ? 
Or according to efforts ? Or to character ? Or to num- 
ber of feet dug ? 

Distinguish between justice and charity. 



CHAPTER XIV 

SOME CUKRENT QUESTIONS IN ECONOMICS 
SPECULATION 

120. We saw in Section 31 that desires 
grow less intense with partial satisfaction. 
One does not become thirstier the Desires are not 
more he drinks, or hungrier the j;f^^|^^/^^/^y 
more he eats. It is possible, though direction. 
it is not common, to have a good thing in 
superfluity. There may be more food upon the 
table than is wanted for that meal. So it is 
within possibility that there should be more 
food in the world than is wanted by the 
people of the world. With pioneers in a new 
country, and especially in a tropical country, 
food supplies often exceed the necessities ; the 
market is glutted, so to speak. And we have 
seen that as men become more numerous the 
bounties of nature become insufficient, so 
that men must work in order to satisfy their 
wants. When things are brought to market 
201 



202 ELEMENTARY ECONOMICS 

for sale, prices, as we know, must go low 
enough so that the demand will absorb the entire 
supply. It quite often happens in the cities 
that ripe fruits are sold at almost nothing. 
The reason for this is plain, when we reflect 
that there is not an unlimited demand for 
bananas or strawberries. At no matter how 
low a price, you would not at one time buy 
very many dozens of bananas. We are again 
in face of the fact that value cannot exist in 
the absence of some measure of scarcity. Un- 
limited abundance would mean the absence of 
value. Thus value is not to be taken as the 
measure of well-being. Utility, and not value, 
points directly to usefulness. Value indicates 
some limitation upon utility by reason of scar- 
city. (See Section 38.) 

121. It is very important that the things we 

most need, like food and coal, should be cheap. 

, The human race can get alonp* well 

Tmngs acutely ^ . . 

needed we get enough with great scarcity and high 
^^^^^' value in diamonds. Those things 

which the human race greatly needs are com- 
monly easy to get, else there would be no human 
race. In fact, the things which we most acutely 
need — • space and air and water ■ — • we mostly get 
for nothing, the supply of them being so great. 



SPECULATION 203 

If the springs slionld dry up, drinking-water 
might acquire value, as it does, in fact, on the 
desert or in the cities. If the rains refused 
to fall, we should have to replace them by 
irrigation ditches ; but this would be no 
cause for gladness. Gas and lamps in place 
of sunlight would be more trouble to no bet- 
ter results. 

122. With many things — with food prod- 
ucts especially — the consuming capacity of 
the world cannot be greatly in- j^ ^^^ ^^^^ 
creased. On the other hand, it is demand elastic 7 
not possible largely to reduce consumption 
without great suffering. We say of such cases 
that the demand is inelastic. With many 
commodities, however, a very large increase in 
supply can be marketed with a relatively small 
reduction in price, while if the price should 
greatly advance, a large part of the demand 
would be withdrawn. Books, pleasure trips, 
sewing machines, and bicycles, are good ex- 
amples of this second class. In these cases we 
say that the demand is elastic. Where the de- 
mand is elastic, the supply may increase much 
more rapidly than the price falls ; so a decrease 
in supply would not greatly raise the price. 
But with food products prices rise out of pro- 



204 ELEMENTARY ECONOMICS 

portion to the decrease in supply, and fall out 
of proportion to the increase. 

123. This explains much that is peculiar in 
the movements of rents. As population in- 
Eiasticity and creases, the poorer lands must be 
rents. Cultivated ; going without the prod- 
ucts is not practicable. So a small increase 
in supply from the opening up of good lands 
or from improvements in agricultural methods 
will make possible the abandonment of poor 
land at the margin of cultivation. 

124. This question of elasticity of demand 
being well understood, we are in position to 
Elasticity and ^®® ^^^ with food products it comes 
prices, about, not only that prices are high 
with a short crop — for this is not strange — 
but that the aggregate selling price of the crop 
is higher for a short than for an abundant 
crop. 

This fact is stated by the English economist 
Thorold Rogers, in the following words : — 

" There is one law of prices which you must know and 
understand before you can make the least progress in 
interpreting the simplest problem. It is known to some 
economists, I do not say all, for it is most unaccountably 
neglected or obscured in most treatises on the subject, as 
Gregory King's Law. We take it a defect in the harvest 
may raise the price of corn in the following proportions : 



SPECULATION 205 

Defect. Above the common rate. 

One-tenth raises the price Three-tenths. 

Two-tenths raises the price Eight-tenths. 

Three-tenths raises the price .... Sixteen-tenths. 

Four-tenths raises the price Twenty-eight tenths. 

Five-tenths raises the price Forty-five tenths. 

The price of any article in demand but at present in 
defect rises in price by a different ratio from that indi- 
cated from the ascertained amount of the deficiency ; the 
price of any article in demand but at present in excess, 
falls in price by a different ratio from that indicated from 
the ascertained amount of the over-supply. The opera- 
tion of the above law is always most dominant in articles 
of prime necessity, in which no notable economy can be 
made without suffering on the part of the people when 
supply is short, and no notable increase of consumption 
can be expected when the quantity is in excess of supply. 
If the article is relatively perishable, the phenomena in- 
crease in intensity on either side." 

We may remark that, as applied to any one 
cereal product, the figures above given are prob- 
ably an over-statement. As applied to the total 
of agricultural products, the error is probably 
in the other direction. 

125. Bearing in mind that food production 
is, in large measure, periodic with the seasons, 
we are now in position to under- Elasticity and 
stand why price fluctuations are g^feSlon 
especially characteristic of food an evil? 
products, and why speculation especially busies 



206 ELEMENTARY ECONOMICS 

itself with these. It is easy to denounce the 
speculator for trafficking in the necessaries of 
life, and for profiting at the expense of society; 
but it is as cheap and shallow as it is easy. 
We need attempt no justification of the mo- 
tives of the speculator — they are probably bad 
enough; but fortunately there are many cases 
in this ♦world where men, seeking only their own 
well-being, bring about the well-being of others. 
The speculator does not commonly cause the 
rise in prices, but merely brings it earlier than 
it would otherwise come. If the supply of food 
is short, prices will have to rise. It is well 
that there are men who make it their business 
to study the crops and the harvests, and who 
give early notice of a coming scarcity, thereby 
encouraging society to economize its supplies, 
and compelling it to do so by forcing prices up. 
Thus in times of seeming plenty, supplies are 
set aside for times of later need ■ — ■ " a service 
which has been well compared, by Archbishop 
Whately, to that rendered by the captain of a 
ship, who, taking account of the stock of pro- 
visions at his disposal, and the length of his 
intended voyage, adjusts to these conditions 
the rations of his crew " (J. E. Cairnes). 

126. The advantages of speculation to the 



SPECULATION 207 

producer are equally evident. But the farmer 
is prone to believe that the profits -q^^^ ^^^ 
are made at his expense; he sees ducer suffer? 
speculators, who own not one pound or bushel 
of product, selling for future delivery vast 
quantities, say of wheat, to buyers who have 
neither the ability nor the intention ever to 
receive the goods. Instead of actual delivery 
of the goods at the date agreed upon, the opera- 
tors fix the terms of settlement by comparison 
of the actual market price with the stipulated 
price. If, for example, wheat is selling at two 
cents 23er bushel higher than the agreed price, 
the seller pays this two cents per bushel to the 
buyer and the transaction is closed; if wheat 
has fallen, the seller wins. 

It strikes the farmer that this enormous sell- 
ing of wheat which does not exist must hammer 
down the price. But for every selling there is 
a buying. If the consumer should turn his at- 
tention to the case, he would be equally justi- 
fied in concluding that all this speculative 
buying must greatly enhance the price. In 
truth, these purely fictitious buyings and sell- 
ings are in the long run of small importance 
or of no importance to producers and consum- 
ers, except as a part of the process by which 



208 ELEMENTARY ECONOMICS 

prices are fixed. But tlie buyers who actually 
take and store the product till the time of con- 
sumption draws near, perform a great service 
to both buyer and seller. If the farmer had to 
sell his product in the fall at a price at which 
ultimate consumers would consent to purchase 
their year's supply, he would receive a con- 
vincing object lesson of the advantage to him 
of this speculative buying. Housekeepers will 
not buy a year's supply of flour in advance, 
unless at a very great saving. Many of them, 
in fact, could not buy if they would. 

127. It is only when the so-called corner is 
brought about that speculation deserves the 
Corners are Condemnation which it receives. 
evil. T]^e motives and methods of the 

speculators are, of course, quite another ques- 
tion. In its ordinary working, speculation 
increases the total usefulness of commodities 
by postponing their consumption to the time 
of greatest need. The effect of the corner 
exactly reverses this process. If the supply can 
be monopolized, the aggregate selling price 
may be increased. Utility is sacrificed to raise 
values. (See Section 38.) The postponement 
of the consumption is at the expense of current 
consumption. An immediate scarcity is fol- 



SPECULATION 209 

lowed by a corresponding excess. It is true 
that the speculator must, after the corner, sell 
at low prices some share of the supply which 
was taken from the market. But this falls far 
short of cancelling his profits; he could per- 
haps even have afforded to destroy it. 

But in order to enjoy the profit from an in- 
creased price, the speculators must have pur- 
chased practically the whole of the market sup- 
ply. This is a difficult matter and requires a 
vast amount of capital, even where the volume 
of the commodity to be cornered is not large. 
The fact that many men, who have no share of 
the supply on hand, offer to sell products and 
agree to deliver them, greatly increases the dif- 
ficulty. These offers are in one sense mere bets 
upon the course of the market, but as long as the 
offerer is responsible the offer must be accepted, 
else it has the same effect to defeat the corner 
as if it represented actual commodity. No cor- 
ner can force prices up except by frightening 
these offers out of the market, or by accepting 
them. When now the corner has succeeded, 
not only does it make the profit upon the sup- 
ply which it has to sell, but also an oftentimes 
enormous profit from the people who have agreed 
to deliver and are not able to fulfil. 



210 ELEMENTARY ECONOMICS 

COMBINATIONS AND MONOPOLIES 

128. The theory of monopoly should now 
occasion little difficulty. It is easy to under- 
stand how it is often better to sell a little at a 
large profit per piece, than more at a smaller 
profit. As long as the monopoly controls the 
supply, it can fix the price at the point where 
the profit is greatest. It is better, for example, 
to sell 500 at three cents profit each than 1000 
at one cent profit each. Of course the mo- 
nopoly has to keep in view the danger of arous- 
ing competition, and the necessity of fighting 
it if it comes. Thus it commonly is true that 
the monopoly prices are kept somewhat below 
mark of maximum profit for the immediate 
time, and occasionally go very low, often much 
below cost, in order to discourage or ruin com- 
petitors. 

Monopolies are probably, on the whole, inju- 
rious to society because of their habit of sacri- 
ficing utility to value ; that is to say, they force 
up the selling price by creating scarcity, — 
they increase the sacrifices while at the same 
time diminishing the consumption, — they sub- 
tract from utility to add to value. (See Sec- 
tion 38.) 



TBABES-UNIONS 211 

TRADES-UNIONS 

129. The antagonism between utility and 
value helps in the explanation of trades-unions. 
Evidently if the number of producers in any 
given line can be artificially restricted, the 
product will be limited, the prices high, and 
the possible wages correspondingly high. The 
union, if it can control the labor supply, can 
exact from the employer all the wages which 
he can afford to pay. The effects may or may 
not, in the price of products, extend to consum- 
ers. It is in the effect on laborers seeking a 
place of employment in the ranks of skilled 
labor that the effects of the unions are chiefly 
to be regretted. In this respect their methods 
are open to the same criticism as are those of 
other monopolies. The attitude of many 
trades-unions toward apprentices is a leading 
instance. The well-being of society demands 
the maximum of intelligence among the la- 
borers and, unless greater advantages in other 
directions are sacrificed, the maximum of prod- 
uct. The exclusion of laborers from employ- 
ment of any sort, or the restriction of them to 
the unskilled industries, strikes at social well- 
being through a diminution of the social prod- 



212 ELEMENTARY ECONOMICS 

uct, and rather increases than diminishes the 
inequalities of distribution. 

But trades-unions are more than associations 
for the restriction of product: they are societies 
for mutual education and mutual insurance. 
These are praiseworthy objects, and tend to in- 
crease the efficiency and the contentedness of 
the laboring classes. As associations for pro- 
tecting the individual laborers against injus- 
tice and oppression by employers, and for 
insisting upon proper conditions of sanitation 
and safety in shops and factories, and upon 
reasonable hours of labor, the unions are effec- 
tive and commendable organizations. 

SUGGESTIVE QUESTIONS 

In what degree can the large concern outdo the smaller 
in economies of production ? 

Is this equally true of the great farm or the great 
store ? 

Ought society to get the benefit of these economies? 

What are the natural limits in the growth of giant 
industries ? 

May these limits be enlarged by trusts and combina- 
tions between different plants ? 

How much has cut-throat competition to do with this? 

In what sense do you regard the law of increasing re- 
turns as a permai?.ent fact in industry? 

How does transportation open the way to the giant 
industry ? 



TEA BES- UNIONS 213 

What benefits can you mention from competition? 

How are honest manufacturers driven to doubtful 
methods ? 

Do you think it proper for the government to enforce 
regulations in regard to sanitation ? Child labor? Adul- 
teration ? Length of work day ? 

Under our form of government would this fall to the 
separate states or to the general government? 

What bearing have protective tariffs on the ease of 
combination ? 

What is the harm in combination ? 

Could anything be done by taxation to obtain for 
society the benefit of cheaper processes, or to protect 
society from artificially high prices ? 

How about the justice of the thing? 

Is it a moral wrong to attempt to wreck another's 
business by selling goods under cost ? What should you 
say of an action for damages in this case ? 

Do you know of any instance of cut-throat competi- 
tion ? Who suffer ? Who gain ? 

In case of street railways, city water works, gas works, 
electric light works, does the public suffer most from 
competition or from combination? 

What do you think of city operation of these industries ? 
City ownership and leasing ? City taxation ? 

What effect do these industries have on city politics ? 
What effect would come under city ownership ? 

What effect would national railways have on poli- 
tics ? 

Is national ownership practicable while there is private 
ownership in the land? What is the connection? 

Do the sam.e considerations apply to telegraph or postal 
service ? 

To what extent do you regard railway discriminations 
as responsible for monopolies ? 



214 ELEMENT ABY ECONOMICS 

In what senses are laborers' interests parallel with em- 
ployers' interests ? 

In what sense adverse to employers' interests ? 

Is the laborers' contest a contest against capital? Is 
it an attempt to lower rates of interest ? 

Can anything be done by labor unions to lower rents ? 

Does the contest concern wages as against interest, 
or wages as against profits? 

' In what degree are profits obtained by unfair treat- 
ment of individual workmen ? By unwholesome or un- 
sanitary conditions for work ? 

By labor of children and women ? 

By adulteration and lying ? 

From which of these do laborers suffer ? 

What can labor unions do in regard to each of these 
evils ? 

If unskilled laborers all work, what determines their 
wages ? 

What effect from a combination which should raise 
the wages? Could as much product be sold? Could 
as many men be employed ? What would the out-of- 
works do? 

Is combination among unskilled laborers likely to be 
effective in raising wages ? In protecting members from 
oppression by employers ? 

Inquire among employers, and see whether they find 
the labor unions a convenience in adjusting disputes. In 
avoiding disputes. 

Is combination among employers possible for regu- 
lating wages ? Probable ? 

Did the Chicago railroads practise it in 1894? 

Would travellers and shippers ultimately get a benefit 
from these lower w^ages ? 

Do strikes commonly succeed ? If not, does this prove 
the failure of strikes to benefit the workmen ? 



THE EIGHT-HOUR DAY 215 

Does the armed peace of Europe tend to prevent war ? 

What do you think of government ownership of rail- 
roads from the wages aspect of the case? 

Can skilled labor through combination get higher 
wages ? 

Must there be methods of excluding competition? 

Is this desirable ? 

If as many men work for as long a time, can wages be 
changed ? 
^ If the number of workers or the length of the day be 



THE EIGHT-HOUR DAY 

130. Recalling that wages, though fixed by 
the adjustment of supply and demand, are de- 
termined by the productivity oi ^ ^^,^^i,^ ,^ , 
labor as the source of the ability P^'o'l^ct. 
to pay wages, — that therefore wages must be 
drawn in the long run from product, and that 
competition tends to fix interest and profit at 
the level of marginal services, — it is clear that 
the effect of the eight-hour day on wages must 
be determined by its effect on the social divi- 
dend. All attempts to obtain high wages by 
making labor scarce, or its aggregate product 
small, rest upon sheer fallacy, unless the restric- 
tion be limited to one industry and that indus- 
try be one in which the monopoly principle may 
be applied. Even here, not employers, but con- 



216 ELEMENTABY ECONOMICS 

sumers, must finally pay the costs of the arti- 
ficial rise. Employers pay wages as fixed by the 
selling price of their products. Shorter hours 
and a relatively high compensation for laborers 
in a given employment, would quickly recruit 
the ranks of wage-earners from agricultural or 
other laborers. 

The question thus remains twofold: (1) Will 
the aggregate production be lessened by the 
change to an eight-hour day? (2) If so, is the 
change desirable? 

131. (1) A twenty-hour working day, if it 
should prove physically possible, would mean 
weary, stupid, ineffective labor. Better results 
in product would be obtained with fewer hours 
and longer rest. In most industries it is prob- 
able that a twelve-hour day is, in the long run, 
and purely as a question of product, undesir- 
able, as compared with ten hours. But this 
shortening process may go too far. That six- 
teen hours is an improvement on twenty, or ten 
on twelve, does not conclusively recommend the 
eight-hour day as against the ten. Much de- 
pends upon the nature of the industry, much 
also upon the national characteristics of the 
laborers. Probably, on the average, productive- 
ness would fall with a change to eight hours. 



THE EIGHT-HOUB BAT 217 

(2) Is this necessarily an evil? Is leisure good 
for anything? On what conditions? How 
about health and content? Morals? 



THE SWEATING SYSTEM 

What fixes the wages of employees in sweatshops? 

Do the employers make unusually large profits or is 
competition probably fully active among them ? 

Do the merchants make large profits in the handling 
of goods from sweatshops, or is the margin one of close 
competition ? 

With so many dozen shirts to sell, is it possible to 
maintain higher prices and yet sell all the shirts ? How 
arrange to get higher prices per shirt. What must be 
the effect on the laborers if only as many shirts are sold 
as can be sold at high prices ? 

What effect (1) on employers, (2) on laborers, if wages 
are increased without increasing the price of products ? 

Is the purchaser of sweatshop products doing a benefit 
or an injury to the employees ? What if the shirts could 
not be sold ? 

132. The conditions of bad sanitation, bad 
water, bad food, ignorance, vice and disease, 
characteristic of the sweatshops, 
are well known. Merchants find 
it convenient and profitable to let the mak- 
ing up of fabrics to the lowest bidder. These 
successful bidders, the sweaters, undertake to 
find the necessary laborers. The work, under- 



218 ELEMENTARY ECONOMICS 

taken at starvation figures, must be placed 
among people compelled to work at starvation 
wages. The fabrics are therefore distributed 
for making among the ignorant and vicious, in 
quarters of cities foul with stench, filth, and 
disease. The labor is performed in garrets and 
cellars, or in sick-rooms among sufferers with 
all sort of contagious ills, where the uncom- 
pleted garment may serve as the pillow or cover 
of fever, cholera, or smallpox. On the count- 
ers of the great wholesale and retail establish- 
ments these sweatshop garments furnish the 
material for great bargain sales or attractive 
trade discounts. 

The notion is held by many people that 
the only thing necessary to cure this great 

What can be ^^'^^ ^^ ^^^' ^^^® State to prohibit let- 
done? -(^ij-^g Qp receiving work at these low 
figures. It remains, however, to ask what 
these ignorant and inferior workers will do if 
prevented from earning these small wages. 
Were something better open to them, it would 
be unnecessary to prohibit this line of employ- 
ment. Or, again, it is urged that purchasers 
should refuse to buy garments made at starva- 
tion wages. How would these starved labor- 
ers be better off then? Unless their product 



LABOR OF WOMEN AND CHILDREN 219 

can be sold for little, it cannot be sold at 
all. 

It may be, however, that as a measure of 
public health, the State should attempt super- 
vision and regulation of the sweatshops. It 
is probably true that the inmates might in 
many cases do better-paying work if they could 
find it, and would often find it if they were 
aware in a general way of its existence, or if 
they were not wanting in energy and self-direc- 
tion. Something is possible here through 
charity and education. But in any event the 
remed}^ will have to begin with the laborers. 
Uninformed denunciation of the system, or of 
the merchant, or of the intermediate employer 
will do little good; nor will the accompanying 
schemes of remedy serve. For this class of 
laborers the choice is between sweatshops and 
something worse. 

LABOR OF WOMEN AND CHILDREN 

133. Courts and lawyers have established the 
rule that in case a parent is shown to be affir- 
matively unfit to care for a child, a 

T 1 ' j_ ^ ' ^ • CMldren. 

guardian may be appointed m his 

place. Merely as a matter of protection to the 



220 ELEMENTARY ECONOMICS 

child, it becomes justifiable, in some cases, to 
limit or suspend the usual authority of the 
parent. 

The labor of children in shops or factories is 
injurious both positively and negatively — posi- 
tively, in weakness and stunted growth from 
over-arduous tasks, negatively in loss of oppor- 
tunity to prepare for the more important tasks 
of later life. These conditions of disadvantage 
tend to reproduce themselves. When the child- 
laborer matures, he in turn finds himself unable 
to give his children proper care and education. 
Thus, in justice to the unborn children as well 
as to the living, some sort of restriction upon 
child labor is desirable. If parents are unable, 
under present conditions, properly to prepare 
their children to live, there is the clearer 
necessity that the next generation be not worse 
equipped. 

General considerations, therefore, favor state 
interference in these matters. Any rule must, 
however, be very flexible in application. Par- 
ents or even whole families are in some cases 
in considerable measure dependent upon the 
services of children, where state aid could not 
be recommended and would not be received. 
The self-respect which goes with independence 



LABOR OF WOMEN AND CHILDREN 221 

is a valuable quantity. Authority should exist 
to handle these cases after their exceptional 
character; otherwise the protection of children 
may result in tyranny for both parents and 
children. 

134. The labor of women stands economi- 
cally and socially upon other grounds. Where 
women's labor in shops or factories 

Women. 

is necessary to a wholesome plane 
of living, it is perhaps to be regretted. But 
that it is to be regretted makes it not the less 
necessary. Especially for married women are 
the effects bad in lower physical tone and in 
neglect of important home duties. 

Whether in any case a woman's labor is neces- 
sary is probably best left to her own decision, 
or that of her family. They best know the 
facts and are most interested in the decision. 
There is small occasion for the state to inter- 
fere otherwise than, as for other laborers, to 
prescribe conditions of good sanitation, light, 
heat, and safety. These latter matters are not 
well left to ordinary methods of adjustment. 
Competition without regulation works out in 
this regard in higher wages for recklessness 
and higher profits for inhumanity. 

The necessity of wage-earning by women 



222 ELEMENTARY ECONOMICS 

may well be regretted; but the active oppo- 
sition to it rests upon the pernicious fallacy, 
already many times remarked, that the compe- 
tition of women reduces the wages of men by an 
amount equal to the wages of the women, and 
possibly by more. It is assumed that wages are 
a fixed quantity and the social dividend inelas- 
tic, instead of depending upon the effectiveness 
of productive forces. If women's labor adds 
to the social product, it necessarily adds to the 
aggregate of wage receipts for wage-earners as 
a whole. Obviously, however, if the compe- 
tition of women centres in some one or some 
few industries, the wage level therein may be 
seriously lowered, and, conceivably, the wage 
aggregate decreased. Value may suffer by the 
mere fact of abundance. Utility and value do 
not run parallel. (Section 38.) Wages are 
derived from value. 

WAGES OF WOMEN 

135. It is familiar that wages depend finally 
on the value of the product. What employers 
can sell their product for will determine how 
much the marginal employers are able to pay as 
wages, and how much competition will compel 
employers in general to pay. Thus in the 



WAGES OF WOMEN 223 

measure that women are less quick, less in- 
genious, less intelligent, or less versatile, their 
wages will suffer. 

As bearing upon the question of efficiency, 
it must be remembered that for some employ- 
ments women are distinctly inferior . 

^ Are women 

to men in endurance and muscular equally valu- 

,, T ^ able employees ? 

strength. In many cases, also, 
women do not expect to remain long enough 
at wage-earning fully to prepare themselves 
therefor or to enter into their work with the 
maximum of interest. But it is still true 
that Avomen are not commonly paid in propor- 
tion to their productive possibilities. They 
could and would produce larger values, were 
they employed where their work is most 
productive. Wages in particular Eeiativeiy large 
employments may be permanently ^crmealTw 
low, if by force of public opinion or Pre- 
law, or by lack of aptitude for other employ- 
ments, certain large classes of workers are re- 
stricted to fcAv employments. This, taken in 
connection with their inferior productive ener- 
gies, is the explanation of the strikingly low 
average wages of women. If countless women 
go into shirt-making, they must get, per shirt, 
wages corresponding to the low price at which 



224 ELEMENTARY ECONOMICS 

shirts must be sold in order to market the 
whole product. Prices for shirts fall to the 
measure of the marginal shirt, and wages for 
all shirt-makers come to be fixed at this same 
margin. There appears to be no remedy except 
to decrease the number of shirt-makers, or to 
find a way to induce people to buy the same 
number of shirts at higher prices. Higher 
prices, if possible, would then induce the pro- 
duction of still more shirts. 

TARIFF, PROTECTION, FREE TRADE 

Write a definition of cost of production. 

What is the employer's ground for asking protection ? 

Why cannot he hire laborers at low wages ? 

If an employer refused to pay reasonable wages what 
would the employees do ? 

Does protection cause high wages or result from high 
wages ? 

Why are Australian wages higher than East Indian? 
Compare as to man and environment. 

What fixes average wages ? 

Why not raise bananas in Canada? 

136. It must ordinarily be best for men to 
follow the lines of employment for which they 
Division of lator ^re bcst adapted. This course con- 
is good, duces to the maximum social divi- 
dend and to the maximum average command of 



TARIFF, PROTECTION, FREE TRADE 225 

wealth. So it is best for communities inside a 
nation, or for nations inside the community of 
nations, to direct their energies to those lines 
of production to which they are best suited. 
To prevent any nation from doing this, or to 
prevent any part of the people within a nation 
from doing this, requires some kind of special 
interference, or inducement, or compulsion. In 
any country in Avhich the material advantages 
are great, or the average productive powers of 
the population high, the wages will be high 
in the average, and it will require a system 
of bounties or special privileges to induce any 
one to follow an industry of relatively low 
productiveness. 

137. Protected industries find their cost of 
production to be too high, in the sense that 
they are unable to pay the wages What is a high 

1 . 1 ,^ ■ -, , . -.xri cost of produc- 

whicli other industries pay. When ^^0^7 
the foreign competitor can hire equally good 
men at low figures, this means that competing 
industries in his country do not offer the labor- 
ers better opportunities for production than his 
industry can offer. Where this is true, it is 
evidently impossible for an industry in the 
country with a higher wage level to maintain 
itself under free competition. This does, in 
Q 



226 ELEMENTARY ECONOMICS 

fact, prove the necessity of pTotection if the 
industry is to exist, but it also proves that the 
industry ought not to exist. Why can it not 
pay the ruling rate of wages ? Simply because 
other industries can pay more than it; they 
produce, per laborer, a greater sum of values. 
When we say that cost of production is high, 
this is exactly what we mean. The cost of any 
article is the displacement of other values pro- 
ducible by the same productive energies. A 
high cost of production is a high displacement. 
Protective tariff is usually a method of wasting 
energy by compelling the production of that 
which could better be purchased, and the aban- 
donment of that which would better be produced. 
It is an attempt to thwart the international 
division of labor. In effect it denies the profit- 
ableness of trade. It suggests that it was a 
mistake to make the world so lars^e. It foro^ets 
that wages flow from product and are limited 
by product, and assumes instead, that they can 
be increased by legislation and legal shuffling. 
In forgetting that wages are a result of product, 
it is assumed that high wages mean a higher 
cost of production reckoned by the piece, and 
low wages a low cost, when in truth cheap labor 
is very often found the dearest labor. 



TARIFF, PROTECTION, FREE TRADE 'I'll 

138. Protection also commonly overlooks 
the fact that peculiarities of environment 
afford special opportunities for par- p^ . ^ 
ticular lines of industry. Far- eels advantages 

. , - , , .,, , of environment. 

Sighted business sense will work 
the forests and the fields, when these are ex- 
cellent, to the exclusion of iron mines which 
are poor. Other nations will work their mines, 
allowing their relatively unprofitable agricult- 
ure to languish. Each people should make 
the most of itself and of its environment. 

In rough outline this covers the entire tariff 
question, though we shall see that there is some- 
thing to say for protection under peculiar con- 
ditions and as a temporary policy. But first 
there are some minor aspects of the question 
which require discussion. 

139. Many people have the impression that 
high prices are a good thing in themselves. 
This opinion probably rests upon ^^^j^i^i^p^i^gg 
the fact that in good times prices desirable? 
are commonly high; it is therefore inferred 
that the high prices make the good times — 
very much as children sometimes believe that 
the swaying trees make the wind blow. As 
we have seen, however, the expanding credit of 
good times accounts for the higher prices. 



228 ELEMENT ABY ECONOMICS 

To assume that high prices are in themselves 
a good thing is to look at the case from the 
point of view of the producer or seller, without 
thought of what he can buy with his money. 
Are low prices There are also people who think low 
desirable? prices an excellent thing, because 
then money buys so much. These people look 
at the case solely from the consumers' point of 
view, forgetting that the first thing is to get 
the money to buy with. In truth, commodities 
cannot all be relatively high, any more than 
every tree of the forest can be higher than the 
others. 

It is neither a good thing nor a bad thing 
for prices to be permanently high or low. This 
is purely a question of the volume of currency, 
relatively to the amount of commodities to be 
exchanged. So when the protectionist goes to 
work deliberately to bring about high prices 
generally, he is proceeding upon fallacious 
reasoning. 

140. But he sometimes has not precisely this 
purpose in view. He has in mind a scheme 

Is it well to sell '^•'^^^^^ ^^®^ ^^^ ^^^^ tend to raise 
without buying? prices, but this is only incidental; 
it is not his main purpose. He hopes to 
arrange things so that people shall not buy so 



TABIFF, PROTECTION, FREE TRADE 229 

largely from abroad and therefore will keep 
their money at home. He expects to export 
as much as before, but to import less. His 
error is in failing to see that, if what was 
before imported is now produced at home, there 
will be correspondingly fewer people to produce 
for export. But should you suggest this diffi- 
culty to him, he would probably reply that his 
plan would give employment to the unemployed 
laborers, so that exports would not suffer. 
Somehow he seems to believe that a smaller 
proportion of unemployed laborers is to be 
found in protected countries than in free -trade 
countries. This is simply not the fact. 

141. But were there anything in this argu- 
ment, his scheme would nevertheless fail wo- 
fully for another reason. Imports ^ .^ .,, ^ 

•^ -L Is it possible to 

are not paid for in money but in ex- sell without 
ports. It is only the balance that 
has to be paid, now to one country and now to 
the other, in money. So far as one nation suc- 
ceeds in exporting more than it imports, there 
must come about an inflow of money. This 
strikes the protectionist as very advantageous. 
This importation of money is just what is 
desired. You may object that this will raise 
prices. Possibly enough so — and the protec- 



230 ELEMENTARY ECONOMICS 

tionists will be still better satisfied to find that 
prices will rise. The people who like to see 
prices going up will be glad too. This .looks 
like a model system; let ns export some more 
goods and get some more money and some more 
rise in prices. 

But there is a difficulty. As fast as domes- 
tic prices rise, it becomes more difficult to mar- 
ket goods abroad. And all the while, as we 
get the foreigners' money, their prices must 
tend to fall as money becomes more scarce 
with them. Our system of selling without 
buying turns out to cut off international trade 
altogether. In fact the money, when we have 
got it, is of no particular help to us unless 
sometime later we expect to send it abroad to 
buy things with. If we sell to foreigners we 
must buy from them. If we refuse to buy from 
them, and produce our own supply instead, we 
shall have little or nothing to sell to them; 
and if we had something to sell, they would be 
unable to buy because of lack of money, or we 
to sell because of surplus of money. 

SOMETHING ON THE OTHER SIDE 

142. What has been said against protective 
tariffs should not be taken to apply to all forms 



SOMETHING ON THE OTHER SIDE 231 

of taxation upon imports. It is necessaiy to 
raise revenue for the expenses of Tariffs as 

ry^ , . . method of 

government. laxation m some taxation. 
form or other is unavoidable. So long there- 
fore as duties are collected, not for the purpose 
of excluding foreign goods from our markets, 
but for the purpose of deriving a revenue from 
such goods as come in, a tariff system may 
afford an excellent method of taxation. 

143. But it is a mistake to suppose that by 
this method the foreign manufacturer or im- 
porter can be made to pay our taxes when tariff is a 
for us.' This is rarely the result in tax who pays it? 
any considerable degree. In truth, the importer 
is as likely to be a citizen of our own country 
as to be a foreigner. But in either case the 
duty paid is in larger part added to the selling 
price of the goods, and is finally collected from 
the domestic consumer. 

144. But admitting this, there are some im- 
portant advantages in this method of collecting 
taxes. The tax is easy of collection and the 
expense is not large in proportion to receipts. 
There is also the advantage that the is tax better 
taxpayer is usually unconscious of ^'^f^y ;, ^^. 
the fact that he is being taxed. This, consciously? 
however, is not an unmixed advantage, since by 



232 



ELEMENTARY ECONOMICS 



the very fact that the taxpayer is not aw^re of 
his burden, he is the less interested to see that 
the government resources are carefully and eco- 
nomically expended. That there is danger of 
extravagance and need for watchfulness may 
be inferred from the course of our national ex- 
penditures in the last one hundred years. The 
following table shows the net ordinary expen- 
ditures of the government, excluding interest, 
together with the population and the per capita 
of expenditure : — 



Year. 


Population. 


EXPENDITUKE. 


Pee 

Capita. 


1800 


5,308,483 


$7,400,000 


1.39 


1810 


7,239,881 


5,300,000 


.75 


1820 


9,638,822 


13,100,000 


1.36 


1830 


12,866,020 


13,200,000 


1.01 


1840 


17,069,452 


24,100,000 


1.41 


1850 


23,100,876 


37,200,000 


1.60 


1860 


31,443,321 


60,000,000 


1.91 


1870 


38,258,371 


164,400,000 


4.25 


1880 


50,155,783 


169,090,000 


3.39 


1890 


62,480,540 


261,637,000 


4.18 


1892 


64,000,000 


321,700,000 


5.04 


1895 


66,500,000 


383,900,000 


5.77 



145. So long as the tariff works purely as a 
measure for revenue, not greatly interfering 



SOMETHING ON THE OTHER SIDE 233 

with the course of foreign trade, and particu- 
larly so long as the tariff does not, ^^^.^ ^3 ^^^^^ 
by excluding foreign goods, necessi- iiarmM? 
tate the existence of industries which waste- 
fully apply our domestic powers of production — • 
that is to say, so long as the tariff is a tariff for 
revenue, and not a tariff for protection — there is 
little room for criticism. England has for many 
years collected by tariffs upon tobaccos and 
alcoholic drinks the larger part of its revenue. 
It is only when goods do not come in and there- 
fore pay no tax that free-traders are greatly in- 
clined to object. 

146. And even here the free-traders do not 
have all the advantage in the theoretical argu- 
ment. It is not true that protection ^^ ^^ ^^^^ ^^^^^_ 
fails in theory and works in prac- warily harmful? 
tice. Just the contrary is true. For certain 
definite ends, and strictly limited in time, 
protection is tenable in theory, although it 
commonly, if not invariably, fails in prac- 
tice. The argument for protection, based upon 
the desirability of stimulus to industries in 
their experimental stages, is not a novel one, 
and has long been admitted by many free-traders 
to be theoretically valid. The difficulties inci- 
dent to providing machinery and plant for a 



234 ELEMENTARY ECONOMICS 

new industry, to establishing sources of supply 
for raw materials, to operating the plant with 
labor at first unskilled, to organizing market 
connections and attracting consumers' demand, 
are so great that, though the industry may ulti- 
mately demonstrate its practicability and profit- 
earning capacity, it may also never requite the 
pioneers for their exceptional outlay. These 
original projectors have no monopoly of the pos- 
sible success, but only of the probable failure. 
In its most important bearings the experiment 
is of social rather than of individual interest, 
and during the period of experiment society 
may fairly be called upon to stand behind, in 
some measure at least, as guarantor. On any 
other terms it is very possible that capable pro- 
jectors will not undertake the experiment. 

147. But on grounds of experience the advo- 
cates of free trade seem fairly to have turned the 
Practically and argument. To admit that the State 
X'rotttion "lay profitably interfere is far from 
fails. admitting that the interference is 

commonly profitable. American history and 
European history unite in convicting the State 
of exceeding stupidity in selecting the experi- 
ments in which it shall co-operate, — in indicat- 
ing that the unsuccessful experiment commonly 



SOMETHING ON THE OTHER SIDE 235 

fails of abandonment when abandonment is 
due, and that the successful experiment com- 
monly receives greater protection in nearly the 
proportion that it ought to receive less, — in 
short, that the system inaugurated to overcome 
the inertia and loss incident to planting a new 
industry, inevitably develops b}^ the dark ways 
of politics into a persistent attempt to maintain 
in existence an energy-wasting failure, or into 
grotesque solicitude for industries grown vigor- 
ously independent. But the theory stands. 

Note. — The ordinary student enters upon the study 
of Political Economy under the impression that the tariff 
question is the main part of it. He has probably by this 
time come to see that the tariff makes no very large share 
of the subject. He ought also to be prepared to appre- 
ciate that in its purely economic aspects the tariff ques- 
tion is of minor practical importance. No very exhaustive 
examination is necessary to establish this fact. 

The number of employees in the leading industries 
affected by protection is as follows (the figures are taken 
from the report of the census of 1890) : — 

Wool 219,132 

Cotton 221,585 

Silk 50,913 

Dyeing and finishing 20,257 

Iron mining 38,227 

Iron and steel manufacture .... 175,506 
Fuel for mining and smelting (esti- 
mated) 15,000 

Total 740,620 



236 ELEMENTARY ECONOMICS 

The number of bread winners in the country is 
22,756,000. If then we compute the product of these 
protected industries as nothing — as all waste — we shall 
have the national dividend reduced by 22HU00 o^' H 
per cent. 

In fact, however, the cotton industry almost entirely, 
the coarser grades of wool, and the mining interests of 
the interior States are now independent of protection. 
It is a liberal estimate to regard one-half of the laborers 
in these industries as dependent for their present employ- 
ment on tariff. Moreover, of the laborers who are really 
held at their present employment by the artificial adjust- 
ments of protection, not 25 per cent of the labor energy 
is wasted, — that is to say, the present product is fully 75 
per cent of what the labor could be made to produce 
under free competitive conditions. 

1 of i of 3^ per cent= | (.406) of 1 per cent. 
Estimating the average per capita income at two dollars 
per day, free trade in these leading industries would 
carry this income to something short of 2.01 (in purchas- 
ing power) . 

SUGGESTIVE QUESTIONS 

What effect does the tariff system have on the use of 
money in elections ? 

On the bribery of representatives ? 

On the wholesome character of popular thought as to 
the sphere of government ? 

On the purity of politics generally V 



CHAPTER XV 

TAXATION 

The right of taxation has been called the essential fact 
of sovereignty. Why ? 

What was the main difficulty with the Articles of Con- 
federation ? 

What is the usual cause for revolution ? How was it 
in American history ? 

Where does the food come from which the judge and 
sheriff eat ? The wool that they wear ? Who pay for 
these ultimately? 

In what sense are all taxes taxes on consumption ? 

What is a tax — not in terms of money but in terms of 
labor or product V 

Why ought a good citizen to be willing to pay taxes ? 
Does he get his money's worth? More? Is it a good 
investment ? 

Do you think even a poor government better than 
none? Mention the different ways in which the ex- 
penses of government return to us in services. 

Discuss as to each of these suggested ways whether the 
rich man is more benefited than the poor man. 

Ought the rich to pay more taxes than the poor? 
Why? 

Should taxes be proportioned to wealth ? Suppose A's 
wealth to be in a picture gallery ; B's in unoccupied town 
lots ; C's in a livery stable ; D's in mortgages ; E's in fac- 
237 



238 ELEMENTARY ECONOMICS 

tories ; F's in tenement houses : should taxation apply- 
to all proportionately ? 

Ought taxes to be proportioned to income ? 

Should it matter that one has ten children to educate 
while another has none, or that one spends his income in 
charity and another in luxury or vice ? 

Should taxes rest especially on luxuries and vices ? 

Should taxes bear on that portion of one's income 
which goes into living expenses rather than on that 
which goes into savings and factories, or vice versa ? 

Do you regard abilities or benefits as the proper basis 
of taxation? 

Who ultimately pays the taxes on a stock of goods ? 
On imports? On factories? On machines? On mort- 
gages ? On wages ? Incomes ? Land rents ? 

Which is the better method, direct or indirect taxa- 
tion ? Mention different considerations. 

Should churches be taxed ? Schools ? 

What moral right has society to compel the unwilling 
to contribute? 

By what sort of taxes does the city get its revenue ? 
The State? The nation? 

Do you approve of inheritance taxes ? 

Should litigants pay all the expenses of court proceed- 
ings ? 

148. Almost all of the mistakes of govern- 
ment in modern days are questions of the 
Taxation is the mis Collection or the misapplication 

moTritw- °^ P"^^^° """^^y- The point at 
rnent, which government and the people 

come vitally and seriously in contact is on this 
question of what it all costs. The tyranny of 



TAXATION 239 

military despots with the violence of armed 
hirelings, has mostly given place to the regular 
processes of law and custom. If the State now 
collected its money well and spent it wisely, 
there would be little occasion to ask more of it.^ 
This power to tax is the central fact in govern- 
ment, its source of life, its chief power for ill or 
good. If governments would but pay their own 
expenses they might do almost anything they 
pleased. The citizen is rarely sensitive or in- 
terested or watchful or angry except as public 
questions are somehow tax questions. The 
State would be an empty abstraction, as harm- 
less as useless, if it could raise no money. 
Taxes are its breath and life. When, under 
the Articles of Confederation, it was attempted 
to create a government without the power to 
tax, the result was a pitiful failure. 

The State is a great system of compulsory 
co-operation. Some people who -^ 

-^ ■'--'- G-overument is 

dislike compulsion go as far as to compulsory co- 
deny the right of compelling people 

1 The writer has not in mind to attempt any discussion or 
limitation of the proper functions of the State, hut merely to 
indicate the feeling and attitude of the public as a whole and 
of the taxpayer in particular toward the actual administration 
of public affairs. Whether, as matter of broad policy or theory, 
the limits of State activity should be widened or narrowed is a 
question which the writer does not intend in this place either to 
ask or to answer. 



240 ELEMENTARY ECONOMICS 

to support the government. These are the 
anarchists. It is a sufficient answer to them 
to say that the right to tax and the right to 
exist are one. Society cannot get along with- 
out government or government without taxes. 

149. But the fact that the revenues of the 
State are obtained by compulsion should per- 
haps have some weight in deciding what use 
we should make of them. If the taking is jus- 
tified by the necessity, it is not far- 
fetched to say that the government 

should take and spend only where necessity 
exists. A voluntary organization like a club 
may do some things with its dues which the 
State in good conscience ought not to do with 
the taxes. 

150. Many people fail to see that whatever 
the government spends must be procured at the 
Taxes come out ©xpense of somebody. In an indis- 
of somebody, tinct and hazy way the idea is abroad 
that the government has some Aladdin's lamp 
or miracle-box by the aid of which, behind the 
curtain, it can mysteriously create wealth. It 
would perhaps be well for us if this hocus- 
pocus method were really possible, but it is bad 
to believe in it, and have it tried, when it 
really will not work. Some one must pay for 



TAXATION 241 

all reckless attempts at wealth-creating and 
wealth- wasting. 

151. This is another case where the use of 
money obscures the real facts. The mere pass- 
ing of money from hand to hand is whatever is 

destroyed is so 



to 



not important. The wastes of kings ^^^^' 
and princes, with their armies of consume. 
retainers and their parades and their wars, 
do no good in making money circulate, but 
dissipate the labor-energy of the armies, and 
destroy vast supplies of food, clothing, equip- 
ment, and stores. In parallel wise, the spend- 
thrift, or idler, or parasite is a public pest. 

Thefts from the public treasury by shifty 
politicians, fat profits on contracts, the army 
of hangers-on, loafers, heelers, and ward poli- 
ticians thrive not by miracles of wealth-making, 
but by the hard toil of the taxpayers. It is 
equally true that the judge, the policeman, the 
fireman, the legislator, the State and county 
officials, though all render good service for 
their salaries and are worthy of their hire, live 
from what is taken from the living of the tax- 
payers. The flour which the official eats will 
never make bread for the contributor; what 
cloth the judge and sheriff wear out is so much 
less to clothe the rest of us; the brick and 



242 ELEMENTARY ECONOMICS 

mortar in the public buildings will never build 
into a house for you or me. Even a poor gov- 
ernment is better than none; taxes are the 
most profitable part of every man's investment; 
officials must be had and paid, and if good must 
be adequately paid; but governments cost — 
and the poorest often cost the most. 

152. The question still remains as to how to 
collect the funds which the State must have. 
How impose Should the tax be levied per capita, or 
the tax? should it be proportioned to wealth, 

or to income, or to expenditure? If upon 
property or wealth, upon what kinds ? Should 
the home, the church, and the factory be 
equally subject to taxation ? 

It is impossible to make general rules which 
shall fit peculiar and special cases. It is mani- 
festly an inequality of burden to tax the father 
of a large family equally with a bachelor, sim- 
ply because the two men are equally wealthy. 
The one may readily spare much, while the 
needs of the other may press him hard. The 
man who rears and educates a large family is by 
this very fact a heavy contributor to society. 
It is not ideal that the wealth, the income of 
which goes to works of charity and philan- 
thropy, should be taxed equally with that which 



TAXATIO]}^ 243 

serves for the maintenance of extravagance and 
vice. Schools and churches also render public 
service under other forms than money. We 
shall, however, find in later sections a method 
by which most of these inequalities may be 
adjusted. 

153. (1) As a practical matter, it is evident 
that the subjects of taxation and the 

. , T 1 , T 1 1 -I ' ^ Practical rules. 

methods selected should involve a 

moderate cost of collection in proportion to the 

revenues obtained. 

(2) As little opportunity as possible should 
be given for shrewdness or dishonesty to avoid 
the tax. This rule applies with especial force 
to some forms of income taxation, to taxes 
levied upon inventories made by the taxpayer, 
and to ad valorem taxes upon imports (duties 
levied by percentage on value). 

(3) Taxes should be levied, as far as possible, 
so that they may not shift. A tax is said to 
shift when the person who seems to pay the 
tax does not in reality pay it, but shoulders it 
off on some one else. For example, there used 
to be a stamp tax on each bunch of matches, as 
there is now on every box of cigars. The 
manufacturer advanced the tax in cash to the 
government, but later, under the form of sell- 



244 ELEMENTARY ECONOMICS 

ing price, shifted the tax for the most part 
upon the consumer. Legislators often blunder 
in attempting to tax one class of people, and 
in reality taxing another. This rule against 
shifting is the most difficult of application in 
the entire subject of taxation. It is evident 
that a tax on production will in some meas- 
ure — and generally for the most part, though 
rarely entirely — be paid by consumers. Taxes 
on interest are in some small part paid by 
the borrowers, but mostly by the consumers of 
the commodities supplied through the aid of the 
borrowed capital. Likewise taxes on any form 
of capital rest chiefly upon consumers, since 
taxes of this sort work like taxes upon produc- 
tion. 

These cases illustrate the most important 
principle in the theory of taxation — that any 
tax which modifies the market price of products 
will, in some measure, shift. Only those taxes 
which, not disturbing the relations of demand 
and supply, fail to produce any effect upon 
market prices, are safe to remain where placed. 

154. Taxes levied directly upon consump- 
Do taxes on con- tion, or in proportion to consump- 
snmption shift? tion, are sometimes of the non- 
shifting and sometimes of the shifting class. 



TAXATION 245 

In fact, as we have already seen, all taxes are 
ultimately taxes on consumption, since taxation 
is in substance the transfer of the right to con- 
sume ; but taxation may be laid upon the 
whole income silent for consumption or upon 
particular articles consumed. Where the tax 
is levied in proportion to the entire income, 
there is no way for it to shift; but if laid upon 
particular commodities, the consumption of 
these commodities is in some measure discour- 
aged and the demand restricted. Values are 
disturbed through disturbance of demand and 
supply, and some measure of shifting becomes 
inevitable. For the most part the consumer — 
but commonly in some measure the producer 
also — will be compelled to bear the tax. 
Taxation upon monopolies does not shift, since 
the monopoly has already fixed upon the most 
profitable market price, and the imposition 
of the tax would therefore have no effect to 
modify the price. 

155. Taxes on rents, or quasi-rents of any 
sort, do not shift, since they affect neither the 
demand nor the supply of products. ^^ ^^^^^ ^^ 

The best illustration of this princi- rents and qnasi- 

rents shift ? 

pie, and the most important appli- 
cation, is found in taxes upon land rents. 



246 ELEMENTARY ECONOMICS 

Land at the margin of cultivation pays no 
rent, or at all events, an inconsiderable rent. 
The selling price of agricultural products — if 
produced at all on marginal land — is approxi- 
mately the cost of production on this marginal 
land. Therefore to tax rents would drive no 
land from cultivation, would attract no land 
for cultivation, and would modify in no meas- 
ure the demand for products or the supply of 
them or the price of them. It is largely upon 
this reasoning that the taxation of land rents 
has been urged by different economists, among 
whom Henry George is perhaps the best known. 
It is argued that the value of land results mostly 
from the growth of population and from the 
progress of society, in railroads, schools, social 
privileges, markets, etc. It is denied that the 
owners or cultivators of land have done or can 
do much to enhance the value of their respec- 
tive holdings. It is granted — indeed it is 
urged — that so far as the increase in value 
is due to improvements on the land, as, for 
example, buildings, or clearing, or drainage, 
taxation is not desirable, but it is asserted that 
the unearned increase — the share of its value 
not due to the owner or his predecessors — 
should be appropriated by society through taxa- 



TAXATION 247 

tion. Under this system the State would not 
become landlord — ownership would be pre- 
served to individuals — but taxation would 
absorb for the State the larger part of the reve- 
nue of ownership. It goes without saying that 
as taxation lowered the owner's revenue, the 
market value of the land would proportionally 
fall. 

This does not strike one as fair or honest 
with regard to the present values of land. No 
matter what their origin may have been, in- 
vestments in land now represent savings from 
all forms of human effort. Society would pos- 
sibly have done well in reserving these values 
to itself, had it started early enough. It 
would probably now do well, if it is practica- 
ble, to take steps to secure to itself any future 
increases in land values, and particularly the 
increases which take place in urban lands (city 
lots) ; but wholesale appropriation of accrued 
values is wholesale robbery. 

156. It has been shown that taxes on inter- 
est mostly shift to borrowers or to consumers. 
By virtue of this shifting process, Taxes on inter- 
taxes of this sort often result in ^^^'7^*^^^^^' 

investments, 

extreme injustice. Commonly, in- etc. 

deed, the very people are burdened who are 



248 ELEMENTARY ECONOMICS 

intended to be favored. A possessor of five 
tliousand dollars of property, owing four thou- 
sand dollars, is Avorth, in fact, but one tliousand 
dollars, and yet may have to pay taxes not 
only upon his five thousand dollars worth of 
property, but to some extent, by way of in- 
creased interest, upon the indebtedness against 
it. Recalling to mind that for every debit 
there is a credit, and that cancellation of this 
credit relationship would work no change in 
the aggregate of social wealth, taxation upon 
interest is seen to be in effect double taxation 
upon wealth, since it is taxed once in the gen- 
eral wealth and again in the credit system. 

157. Taxation proportioned to the benefits 
derived from government would in great part 
Sh Id t f 1- 6^6™P^ ^^^ ^®^y people best able to 
low benefits or pay — those bcst able to dispense 
with the aid or protection of the 
State. The millionnaire is not benefited a thou- 
sandfold more than the humble householder. 
The pauper is greatly benefited and yet pays 
nothing. Taxation necessarily avoids the very 
poor, else that which is taken under the form 
of tax must be returned as public charity. 

Taxation according to ability to pay would 
require careful examination of the properties 



TAXATION 249 

owned, whether income paying or otherwise, 
and would require careful account of the 
family and social obligations recognized and 
fulfilled by the contributor. As we have 
already seen, the father of a large family does 
not stand, for this purpose, on a level with 
the bachelor. 

158. And yet, on the whole, the collection 
of taxes according to ability to bear the tax, 
recommends itself as the best ap- income tax is 
proximation to fairness and practi- ^^ ability tax. 
cability. Burdens are thereby proportioned to 
strength. Upon this line of reasoning the 
income tax is commonly regarded as the ideal 
tax, to the extent that it can be made practi- 
cable in operation. A progressively higher 
rate of taxation is commonly advised with 
increasing income. Here, again, the difficulty 
presents itself of making allowances for the 
different uses to which incomes are put. 

Proceeding, however, upon the basis of in- 
come — of taxation according to ability — a 
rational and practicable system is within reach. 

Let it be recalled that all taxes are, in ulti- 
mate incidence, taxes on consumption (Sec- 
tion 151), that no one gets any benefit of his 
wealth — otherwise than in the mere power and 



250 ELEMENT ABY ECONOMICS 

pride of possession — till he comes to use it. 
If, now, all taxes were drawn from that por- 
tion of income which goes to the consumption 
of the contributor, no philanthropist would 
stand under penalty for his charities. There 
is no occasion to tax savings as long as they 
are represented by factories or until they are 
turned by the owner to his own benefit. Seed 
at the time of planting is best exempt; wait 
for the harvest. If the owner of wealth is 
taxed prior to the time of consumption, he is 
taxed for that which has not yet served him and 
may never come to service. This tax, also, is 
certain, in some measure, to shift. 

159. Incomes then should be taxed not by 
the measure of receipts, but by the measure 
Outgo tax is of expenditure — not by income but 
ideal tax. j^y outgo. This principle has been 

put in successful operation by the French. 
The dangers of perjury, the premiums upon 
dishonesty, and the general impracticability 
which have attended all attempts at income 
taxation in America, as well as the injustices 
and the shifting which mark income taxation 
when proportioned to receipts, are all avoided 
by adjusting the tax levy in accordance with 
outside indications of expenditure, for ex- 



TAXATION 251 

ample, upon tlie rental value of the home, the 
amount of furniture, the number of servants 
and of horses. Undoubtedly the system re- 
quires skill in the selection of leading facts and 
in the apportionment of their relative weight, 
but amounts in effect to a tax on that portion 
of income expended for personal uses. 

Clearly, however, this system is not ideal if 
no allowance is made for the exemption of 
incomes at or below the strict requirements of 
life, or if no provision is made for progres- 
sive burdens upon larger expenditures. With 
these modifications provided for, this form of 
income tax burdens the wealthy in proportion 
to their ability to bear the burden. Nor is it 
to be condemned on this ground as unjust, in 
view of the fact that society as a whole fur- 
nishes the organization and the civilization in 
which alone great wealth becomes possible. 

160. If, however, the rich are to be taxed in 
the measure of their capacity, so should the 
poor. Whatever is spent for vice ^^^^^ ^^^ ^^ 
or luxury in any stratum of society, the poor accord- 
is by that fact proved not indispen- 
sable. Here is an opportunity to tax the poor 
to their benefit, or at all events, to no great 
injury or burden. Here is the theoretical and 



252 ELEMENTARY ECONOMICS 

practical justification for exceptionally higli 
taxes levied in England and America on alco- 
holic drinks and tobacco. All of these taxes 
may be avoided by abstention from consump- 
tion. Should taxation of this sort seem to 
savor too much of paternalism and sumptuary 
legislation — if it is objected that there is too 
great room here for mistaken, or extreme meas- 
ures — the answer is that the State must follow 
what light it has. Taxes must be collected; 
they fall of necessity upon one sort of con- 
sumption or another; the State is in duty 
bound to collect its revenues with as little 
harm as possible. 

161. Succession or inheritance taxes have 
been much discussed of late years. Upon the 
death of a rich man his property passes to those 
who have not earned it, whose usefulness in 
society is not certain to be increased by the 
receipt of it, and whose claim to it as against 
Inheritance society is not entirely clear, in view 
taxes. of ^]^g f^Qf^ ^i^^j^ society has had a 

much larger share than the}^ in the creation of 
it. It is an added advantage that the tax is 
not felt as a great burden by those whose gains 
come to them as pure good fortune. There is, 
of course, danger that the tax be placed so high 



TAXATION 253 

as to stimulate evasion by gifts before death. 
Partly in view of this, it is generally advised 
to fix the rate low for cases where the property 
goes to wives or children, and higher as the 
amount is greater or as the property goes to 
more distant relatives. 

This method of taxation would be produc- 
tive of large revenues and appears to have 
many advantages. It is, however, by many 
thinkers vigorously condemned (1) as weaken- 
ing the motives for saving; (2) as interfering 
with the owner's right to do as he will with 
his own; (3) as partaking of class legislation 
or of socialistic tendencies. 

162. Under our form of government, income 
taxes should probably be collected by the 
national government, as should also taxes on 
alcoholic drinks and tobacco, as far as they are 
levied under the form of tariff or of taxes on 
production. Inheritance and land taxation, 
and all forms of taxation upon consumption 
by license methods, are probably best placed 
with State and local governments. 

It is worth noting, as a matter of experience, 
that taxation upon personal property, as admin- 
istered in America, is impracticable, consis- 
tently with justice, and commonly fails, for 



254 ELEMENTARY ECONOMICS 

the most part, of enforcement. In almost all 
communities, and especially in the newer 
communities, land taxation affords nearly the 
entire revenue. Unfortunately, however, no 
distinction is made between land and improve- 
ments. 

SUGGESTIVE QUESTIONS 

Compare the tax bill with that of the grocer. 

Ought the right to vote to depend in any way upon 
property or to be influenced by it? 

How does taxation differ from robbery ? 

Why do anarchists object to taxation ? 

What was Rousseau's theory of the social contract ? 

Ought public funds to be used for Fourth of July 
celebrations ? 

What is a poll tax ? 

Are taxes better direct or indirect ? 

Is it wise to assist private educational institutions with 
public funds ? 

Suppose A has $100,000 all invested -in real estate 
mortgages, upon how much is he taxed ? 

Can he shift this, in part, upon some one else? 

Suppose he himself owes $10,000 to the bank ; will this 
be deducted from the amount upon which he is taxed ? 
Ought it? 

Suppose you own a farm worth $5000 and owe A $4000 
toward the purchase price; what is your net wealth? 
On how much do you pay taxes, — $1000, $5000, $8000, 
or $9000? 

Are all who are taxed citizens ? Ought all to be ? 

Are criminal courts of service to those who never have 
litigation? How about civil courts? 



TAXATIOI^ 255 

What harm in taxing the grain which makes the flour ? 
Why better tax the flour ? 

Is tariff taxation sufficiently near to the point of con- 
sumption ? Is it economical of collection ? 

Does it place unusual premiums on dishonesty? 

Does it bear in desirable proportions upon rich and 
poor ? 

On what classes does taxation on whiskey or tobacco 
fall? 

Is this better than an income tax ? 

On what classes does the income tax mostly fall? 

What do you say of the expediency of limiting taxa- 
tion to two forms, — an income tax for the rich, a luxury 
and vice tax for both rich and poor ? 

Would you add to this a land tax, or, more properly, 
a rent tax ? 

Is an income tax best levied on the basis of income re- 
ceived or of income expended ? 

The French assess their income tax on the basis of a 
few leading indications of the expenses of living, — rental 
value of house, amount of furniture, number of servants, 
etc. ; what do you say of this ? 

Is it true that " tariff is a tax " ? 

Is it true that the foreigner pays the import duty ? 

Do producers or consumers pay charges of transpor- 
tation ? 

Do producers or consumers pay the profits of specula- 
tors ? 

Do lenders or borrowers pay for the risk element in 
the loan ? Do consumers ultimately pay any part of this ? 

Does a tax on land by the acre fall on landlords? 
Ten ants ? C onsumers ? 

Who would pay a percentage tax on rents ? 

On whom does a tax on residence property fall? 

Where does a tax on a factory finally fall ? A tax on 



256 ELEMENTARY ECONOMICS 

mortgages? On railroads? On dividends? On rail- 
road stocks? 

What do you think of a succession tax (tax on inheri- 
tances) ? 

Should taxation on incomes be progressive ? 

Should taxation on public franchises be progressive ? 



CHAPTER XVI 

CONSUMPTION, STANDARDS OF LIFE, AND 
FASHION 

163. In ancient times it was a question 
earnestly discussed by the logicians whether 
chickens came before eggs or eggs before chick- 
ens. Something like this puzzle is met in try- 
ing to decide whether demand precedes supply 
or supply demand — whether desire goes before 
production or production before desire. It 
seems, on the one hand, to go without saying, 
that no one would set himself to produce a 
thing unless he wanted it when produced. He 
might of course produce it to sell, but would 
care to sell only as he cared for the thing which 
he would get in return. 

164. But, on the other hand, how shall one 
come to desire Avhat he has never had? Use 
must precede habit. It is easy to wMcii is pri- 
go without that which one has ^^7 ['^''' 

° production or 

never learned to Avant. One gets consmnption? 
enmeshed in the same sort of logical tangle 
s 257 



258 ELEMENTARY ECONOMICS 

in attempting to decide which existed first, 
labor or capital. Fortunately it doesn't much 
matter. So with demand and supply; they 
are not precisely inseparable, but never very 
widely part company. Which came first in 
the beginning of human life we need not ask. 
For modern men it is true that that which we 
are accustomed to we desire, and finally come 
more or less acutely to need. We desire also 
better things of the sort we have had, and more 
of them, and we find our desires extending to 
still other and different things, if only they are 
not too different. But inasmuch as men gener- 
ally have to work for what they get, and early 
or late in the day find work a drag or a burden, 
it comes about that we stop work before all our 
wants are fully satisfied. Our desires thus 
always outrun our supplies, wherever supply 
does not come as a free and unlimited gift. 
Men work till the pain of more work out- 
weighs the pain of unsatisfied want. It is 
therefore only desire that induces effort with 
its resulting product; but this resulting prod- 
uct is in turn a cause, fixing the desire and 
slowly establishing the need, while it also 
slowly opens the way to a wider sweep of need 
and desire. 



CONSUMPTION 259 

Evidently enough, consumption must adapt 
itself to production, though it is equally clear 
that consumption furnishes the motive for pro- 
duction. That the savage in the African bush 
is a man of few desires and simple necessities is 
the larger part of his good fortune. His sur- 
roundings might possibly suffice for a larger 
life, if he had the physical and mental equip- 
ment to turn his opportunities to his advantage. 
Lacking the different forms of inner power, he is 
fortunate in his lack of desire. But in the last 
analysis it is the lack of ability to satisfy the 
desire which explains the absence of the desire. 

The broad proposition toward which all this 
tends is that desires are strong ajDproximately 
as realization is within the horizon of possibility. 
In more common j)hrase, the standards of living 
or of comfort in any society will be fixed by its 
productive efficiency. 

165. We shall shortly return to examine this 
proposition more closely in its relations to the in- 
dividual. But societies, at any rate, ^he expansive- 
do not greatly desire what they have ^^ss of desires. 
never had. The existence of the desire is the 
evidence that its satisfaction is not unknown. 
Patagonians are said to sleep naked on frozen 
ground with hoar frost for blankets. Harsh 



260 ELEMENTAEY ECONOMICS 

conditions grow bearable by use. This is 
merely another aspect of correspondence — of 
adaptation to environment. And yet, as we 
have seen, all this is consistent with expan- 
siveness in needs and desires. The Patagonian, 
having accustomed himself to cold nights with- 
out bedding, would doubtless find himself 
uncomfortable under heavy blankets, yet would 
take kindly to light coverings, if they were to 
be had for the asking, and, once accustomed to 
these, would be glad of more. There is always 
this unsatisfied margin of desire. If the blan- 
kets become sufficient in quantity, there is 
indefinite room for expansion in quality. Each 
fulfilment brings its new margin of demand. 
The need for protection rises by successive 
stages from huts, straw pallets, and coarse furs, 
to palaces, canopied couches, and eider-down 
covers. 

Keep constantly in mind, however, that this 
process of development is slow. Desire and 
satisfaction are bound closely together, each 
gaining by littles through the other. Demand 
grows only by what it feeds upon, like potatoes 
or fire or opium-eating. There is no utility 
until there is a corresponding need; and with 
any society the ability to enjoy never gets very 



CONSUMPTION 261 

wide of the ability to produce. A few years 
ago the United States government built each 
brave of the Pawnee nation a house. Each 
brave set up his teepee by the side of the 
house, put his ponies in the house and himself 
in the teepee. The government asked too much 
of the Indian's expansiveness of desire; it 
overshot the mark. A little better teepee 
would have been a better present. These 
things do not move by large leaps. 

In the expansiveness of human desires is 
found, for the temperate zones, the certitude of 
human progress and the security against stag- 
nation of effort; in the slowness of expansion is 
discovered the secret of the indolence and inef- 
fectiveness characteristic of human life in the 
tropics, where the bounty of nature so far out- 
runs desires as to discourage effort. The same 
explanation applies in reverse order to the polar 
regions, where the disproportion between effort 
and its rewards often discourages all activity 
other than that essential to mere existence. 

166. But is all of this true for individuals 
as well as for races? Yes, and no. ^^ ^.. , 

' Does this apply 

It is true of the primary, the physi- to the individ- 

cai requirements — the need oi lood, 

clothing, and shelter. Expansiveness is espe- 



262 ELEMENTABY ECONOMICS 

cially slow here. It is true even in the higher 
desires, in the realm of mind and thought — of 
music, poetry, and art, Avhere satiation does not 
come and appetites do not fail, but rather grow 
with use. But what are we to make of the fact 
that, as applied to men separately, many com- 
modities are prized not merely in proportion to 
their scarcity, but because of their scarcity — 
diamonds, for example? That which becomes 
common often seems to lose its savor; perhaps 
we should feel the loss, but it is somehow our 
harsh case that we realize the value only in the 
want. In daily life you and I appear to desire 
most vigorously that which we cannot have, 
and yet to care wondrous little for the thing if 
we finally get it. This is bad — looks bad for 
our theory, too. 

Something more needs to be said. It is the 
penalty of any unworthy desire, not only that 
its pleasures endure but for a season, but also 
that in each attainment there is hidden its own 
peculiar disappointment. The pleasure is not 
what we thought it would be ; only the skin of 
the apple had the glowing color; there was 
more advertised on the show bills than was ex- 
hibited in the tent. All goods which get their 
value to us merely by virtue of the fact that 



STANDARDS OF LIFE, AND FASHION 263 

others have them, or have them not, or think 
we ought to have them, are of this delusive 
sort. 

167. Human desires may be broadly classi- 
fied accordingly as they have to do primarily 
and directly (1) with self or (2) j^-^^^^^^^,^^ 
with fellow beings. We may term and non-disap- 

. pointing desires. 

these desires (1) personal, (2) so- 
cial. There is a lower and a higher in 
each. 

Within the personal class must be included 
the desires for food, shelter, and clothing — the 
needs which go with the protection of life and 
to which we are subject through our physical 
necessities. These are the needs, differing 
only in degree, which we share with all animal 
life. Within this class also are the desires 
which go with the distinctively higher and 
human development in intellect — the thought- 
ful aspirations and interests, the literary, scien- 
tific, artistic, and musical tastes and loves. 
These endure not for a season merely. " Other 
interests are not suited to all times and seasons 
and places, but these serve as the grace of youth 
and the consolation of old age, as ornament for 
prosperity, as refuge and solace in ill fortune, 
a delight at home and a refreshment in the out- 



264 ELEMENTARY ECONOMICS 

side turmoil ; these are with us always — in our 
nightly vigils, in our wanderings, at our country 
firesides " (Cicero). We have no need to con- 
demn the everyday life of bread-winning, its 
needs and interests and rewards. All better 
living depends upon being able to live, and for 
all higher personal and social ends it is funda- 
mental that we live honestly and by the right 
of effort. But in the things of thought there 
normally goes no disappointment, failure, or 
waste — ^no limit upon appetite — no disgust 
from satiation. 

In the, desires which primarily regard others 
there is likewise a lower and a higher, which 
we will term (1) the social and (2) the non- 
social, in the sense of the helpful and the non- 
helpful. With these also there go on one 
side decay and disappointment, on the other, 
increase and abiding joy. Whatever brings 
pleasure at another's loss or pain, hides within 
itself its own limitation and its ultimate de- 
struction. It is like the rose with a worm at 
the heart. It is only the pleasure of doing 
good which surprises by its greatness and com- 
pleteness. And so Ave return with a new 
meaning to our earlier words: "Those goods 
which, get their value to us merely by virtue of 



STANDARDS OF LIFE, AND FASHION 2G5 

the fact that others have them, or have them 
not, are of this delusive sort." 

168. The most important application of this 
principle is to the consumption of wealth in 
ostentation and display — in what may be 
broadly termed competitive show. After the 
neat and comfortable is attained, expenditure 
in style, or fashion, or elegance, 

,. ., . •,! • Ostentation. 

ordinarily carries with it no great 
gratification, otherwise than in the unworthy 
consciousness of being admired or envied. 
Socially this outlay is waste or worse than 
waste. Each expends because others expend, 
and no one is the gainer. Thus material 
progress in the way in which we use it, — 
material progress, so far as it is directed to 
competitive show, — cancels itself in a strife 
for precedence; thereby we not only waste the 
product of our own energy by an automatic 
method of cancellation by averages, but in 
wasting our own share of product, we make, 
by comparison, our neighbor's share poor and 
mean and insufficient. We rob ourselves and 
yet filch from him. There is no share of gain 
in it for any one that does not stand for dis- 
content and envy for some one else. 

The first law of ostentation is, then, this — ■ 



266 ELEMENTARY ECONOMICS 

that all ostentation is waste; the second law, 
that the luxury of the rich not merely, in 
some slight degree through waste, causes, but, 
through discontent and by the method of com- 
parison, is the poverty of the poor. 



CHAPTER XVII 

CONCLUSION 

169. With the increase of knowledge in the 
modern world, with its advance in intellectual 
acquirement, its multiplied powers over the 
resources of nature, its new methods and new 
arts, its inherited wealth of achievement and 
unlimited promise of progress, there have 
grown up the new needs and the new desires 
which attach themselves to human life as the 
capacity for fulfilment increasingly falls within 
human reach. That the desires of men are 
safe to outrun their accomplishment ^, 
has been sufficiently shown. It is ^^^i does the 

. world offer to 

thereiore certain that there never the young man 
has been or can be a surplus of °^y°^^J 

^ woman ? 

production over the ability to con- Are all things 

overdone ? 

sume. In the long adjnstment 
markets will never fail the factory ; new inven- 
tions and more effective machinery must for- 
ever remain the welcome auxiliaries of hu- 
man effort — the facile servants of new wants. 
267 



268 ELEMENTARY ECONOMICS 

Each human being born to the world adds a 
further demand to its markets as well as an 
increase of energy to its productive power. 
There may be over-production in some one 
or some few directions, but only in the sense 
that the production is disproportionate to the 
output of other commodities, and thereby 
entails a loss upon those producers who have 
been mistaken in their estimates. Low prices 
to the producer mean cheap consumption to 
the consumer. When, as a result of finan- 
cial disturbance, or flurry, or panic, factories 
close and men fall to idleness and want, the 
evil in its very nature is one of need and not 
of surplus. That nation or that individual 
whose normal condition is want, and whose 
chronic disease is poverty, suffers by the very 
fact that in the environment as it exists, and 
with the abilities possessed, it is impossible 
adequately to solve the problem set by neces- 
sity. There is not too little but too much 
work to do. Wages are low because of small 
per capita product. 

It follows that to suppose that there is in- 
creasing difficulty in finding a place and obtain- 
ing a foothold in the world, is to misunderstand 
the conditions of modern society, and to misin- 



CONCLUSION 269 

terpret the opportunities of modern life. The 
opportunities are yearly not less but more, the 
demand not smaller but greater, the remunera- 
tions not increasingly meagre but increasingly 
generous. When we are told, as we constantly 
are, that the professions are crowded and busi- 
ness everywhere overdone, that the clerkships 
will not go around, and that the applicants are 
more than the places, we may safely judge 
that, in so far as this is true, it means that the 
things which men most desire to do are not the 
things most desired to be done. It is possible 
to have too many doctors, lawyers, ministers, 
and teachers. Until half the demand of the 
world is for doctoring, preaching, teaching, and 
advising, it Avill not be possible for half the 
population of the world to be dignified mem- 
bers of the learned professions. The salesmen 
in the shops and the commercial travellers on 
the road must bear some sort of proportion to 
the goods which are to be marketed. So long 
as every lad especially voluble or quarrelsome 
believes himself to be set apart for the law, 
every quiet and earnest youth for the ministry, 
and all boys wanting in noticeable qualities of 
any sort for the medical profession or for teach- 
ing, it is certain that some of these professions 



270 ELEMENTARY ECONOMICS 

will be overdone. The supply in these lines 
readily outruns the demand. 

There need be no lack of hope or effort 
because of this — there is always demand for 
the best; but it is well to face the fact that 
the demand is a limited demand, and that the 
places of social glitter and learned dignity 
cannot suffice for every high school graduate 
and every holder of a college degree. There is 
room for every worker only on condition that 
he is willing to do the work which is waiting 
to be done. In the breaking down of caste and 
class distinctions, in the popular institutions 
of this modern era with its wide and free com- 
petition, there is abundant place for ambition 
and ability and unlimited room for lives of use- 
fulness; but it does not follow, and it is not 
true that, with the rising level of popular intel- 
ligence, and with the magnificent offer to rich 
and poor alike of advanced and thorough edu- 
cation, there can go with every case of liberal 
training a place of precedence and fortune. 
There is no lack of demand for skilled laborers 
and capable artisans. There is plenty of room 
for honest and respectable service, but not for 
choice or elegant service. 

This truth holds for riches as for position. 



CONCLUSION 271 

The possibility of a reasonable competence, in 
the sense of independence and freedom from 
want, exists for each and all. Wealth, how- 
ever, is relative, and is therefore in its very 
nature exceptional. 

170. There is danger that from the almost 
exclusive attention of Political Economy to 
the phenomena of wealth-production ^, , . 
and wealth-distribution, the truth are best wortli 

^ ^ T 1 1 getting? 

may come to be obscured that the 
jDurpose of living is something more and some- 
thing better than either position-getting or 
wealth-making. It must be constantly held 
in mind that wealth is at best only a means 
to an end. Political Economy does not pur- 
port to be the whole science of living. A 
full, symmetrical life rightly lived is the 
rational purpose of all effort. Political Econ- 
omy makes many important additions to our 
knowledge of social relations and social duties. 
But that you have learned something of the 
methods and laws of trade and legislation does 
not involve the proposition that human life, its 
values, its purposes, and its success, are to be 
subjected to trade standards or measured by 
them. 

The best things in life are not found in the 



272 ELEMENTARY ECONOMICS 

markets — cannot be bought and sold. Success 
in life is not merely to die rich. "Wealth is 
only one of the good things, it is not the best 
thing; it may, indeed, not be a good thing. 
Made to measure success or to furnish the basis 
of social precedence, wealth may vitiate all 
social progress. That land fares ill in which 
materialism has become the social faith, in 
which politics has become a great game of 
business, where great fortunes command politi- 
cal victory and where victory commands great 
fortune. The scramble for wealth may become 
a disease and multiply diseases. Individual 
contentment, social safety, and race survival 
do not lie of necessity and always along this 
line. Material progress is a good thing only 
when it serves for higher ends, never when it 
displaces them. To forget this truth in the 
pursuit of wealth is "as if a man journeying 
home and finding a good inn upon the road, and 
liking it, were to stay forever at the inn. Man, 
thou hast forgotten thine object; thy journey 
was not to this but through this " (Epictetus). 

This outlook upon life is not a hopeless one ; 
but even were it so, truth is truth, and clear 
thinking will face it. That in the commercial 
sense, and according to prevailing standards, 



CONCLUSION 273 

most of us are born to fail, finds its consolation 
in the fact that life's highest purposes and 
sufficing pleasures lead us otherwhere. 

In truth, if well-being were only to be found 
in wealth, if plain living and high thinking 
could not suffice for happiness, the lot of man 
would be indeed a harsh one. The places of 
leadership are of necessity few; commanders 
are such only as there are followers. "Power 
finds its place in lack of power." These things 
are relative; there are a hundred privates for 
one captain, hundreds of wage-earners to one 
factory-owner. It is not in the nature of 
things that the many lead; it would then be 
an ill world in which only the leaders could 
be glad. 

171. It follows from all this that your years 
of study are not rightly to be devoted to a 
preparation for getting rich, or for what is the pur- 
acquiring honors of profession or pose of culture ? 
place, but rather to acquiring fitness for what- 
ever duty or opportunity may present itself. 
Make yourself ready for usefulness. Do not 
allow the zeal to be earning something to lead 
you half-educated into a position as clerk or 
errand-boy; this is to gain unfitness for the 
more enduring tasks and the greater oppor- 



274 ELEMENTARY ECONOMICS 

tunities to come. Distrust all schemes of edu- 
cation which are called practical. Only in the 
broader and higher sense should school train- 
ing be useful — never in a narrow meaning of 
trades and book-keeping and shorthand. See 
to it for yourself, and see to it one day for 
your children, that the money-chasing mania 
does not cast its blight over all the years and 
discipline of youth. No matter how hard we 
may strive that it be not so, the interests of 
bread-winning and of socially imposed place- 
hunting are certain to occupy us overmuch. 

A new notion of the meaning of education 
needs to be adopted, and a saner measure of the 
importance and advantage that attach to it. 
With this new perspective there may come about 
for pupils and instructors a more rational spirit 
in education. If the schools succeed in fixing 
upon the student a false estimate of his sphere 
and duty in life, if the student emerges from 
the school with a distorted estimate of his indi- 
vidual importance, with a sense of unfitness in 
attempting the common lines of bread-winning, 
with distaste therefor and with certain discon- 
tent therein, he is not well but ill prepared for 
the life which he must lead, and society will 
almost surely suffer in the outcome. Educa- 



CONCLUSION 275 

tion should be a fitting and not an unfitting. 
Educated do-nothings and make-nothings had 
better have been left uneducated. They recruit 
the army of discontent — the livers by w^it 
and device — the social outlaws, detected or 
successful. 

We need join in no wholesale condemnation 
of education. The best things in the world 
come with it; but its promises and advantages 
are misconceived and the motives Avith which 
it is sought require amendment. To suppose 
that only the professional man needs to be well 
educated is a gross mistake. There is no cult- 
ure too thorough for the ordinary bread-winner, 
while the doctor and the lawyer, if content to 
be commonplace hacks in their profession, can 
readily dispense with advanced training other 
than that of the special and professional schools. 
It is elsewhere than in the field, the shop, or 
the office, that complete and healthful living 
requires full mental and moral equipment and 
well-rounded intellectual powers. It is equally 
true that to the intelligence of the farmers and 
artisans and day-laborers and not to some saving 
power outside, must society look for its safety. 

The schools should teach us how to use the 
wealth which we may later gain. The edu- 



276 ELEMENTARY ECONOMICS 

cated man has no great advantage over the un- 
cultivated in the art of getting dollars, but only 
in the art of making dollars worth having when 
once they are gained. To get the best out of 
money is a secret which goes only with refined 
tastes and thoughtful interests. Education 
must indeed be a preparation for life, but a 
preparation in the art of living it — a period 
of acquirement of purposes, tastes, and aspira- 
tions, of broad, earnest, generous interest in 
the things of thought. 

With the right things studied in the schools 
— rightly taught and rightly learned — intel- 
lectual life will not cease with the years of 
school attendance. The development afforded 
by the active life of politics and money-getting 
is one-sided and inadequate; the inner life 
suffers. The better part of education must 
then lie in the creation of an effective, abiding 
interest in the things worth knowing. School 
has essentially missed its purpose if it has 
failed to fill you with questionings, and 
doubts, and interests, whereby all the phenom- 
ena of nature and society may stand to you 
for interrogation points, and every incident 
and experience furnish its fund of suggestion 
for thought and its stimulus for growth. 



INDEX 



(Eeferences are to Sections) 



Ability. See Taxation. 

Abstinence. See Interest. 
Adaptation, law of, 5. 
Agriculture. See Land and 

Rent. 
Alcoholic drinks . *S'ee Taxation. 
Apprentices, See Trades-unions. 

Banks, statements. See Cur- 
rency. 
Barter, 79, 80. 

Bills of exchange and drafts, 95. 
Bimetallism. See Currency. 
Birth and death rates, 76. 
See Population. 

Cairnes, John, 125. 
Capital, 

advantages of, 22, 54, 55. 

creation of, 21. 

defined, 21, note. 

intellectual, 19. 

See Interest. 
Child labor, 133, 134. 
Coin. See Currency. 
Combinations. See Monopolies. 
Commercial crises. See Cur- 
rency. 
Communism. See Socialism. 
Competitive system, 

criticised and defended, 107. 



Consumption of wealth, 163-178. 
Co-operation, 114. 
Corners. See Speculation. 
Corporations, 114, 
Correspondence, law of, 5. 
Cost of production, 40-44. 

analysis, 43. 

the marginal doctrine, 41, 
44, 52. 
Credit. See Currency. 
Crises. See Currency. 
Cultivation, Margin of. See 

Rent. 
Currency, 

necessary qualities in money 
commodity, 81. 

credit is exchange, 82. 

credit currency, 95. 

standard of deferred paj^- 
ments, 85. 

division of labor makes 
utility of money, 80, 87. 

silver question, 86. 

value of the unit, 89. 

demand and supply of 
money, 90-94. 

paper money, 96, 100. 

Gresham's law, 97-100. 

crises, 101-106. 

remedies, 106. 

banks, 95. 



277 



278 



INDEX 



Currency, 

bank-statements, 94, 95. 
qualities of gold and sil- 
ver, 81. 
Customs tariff. See Interna- 
tional trade. 

Decreasing returns. See 

Land and Rent. 
Demand, the primary fact, 13. 
expansiveness of desires, 

165, 166. 
See Value. 
Desire. See Demand. 
Diminishing returns. See Land 

and Rent. 
Distribution, 63-71. 
tendencies, 69-71. 
primarily a question of 
product, 63. 
Division of labor, 

helps production, 106. 
relation to currency. See 

Currency. 
See International trade. 

Economics, 

scope of, 1-4. 

definition of, 4. 
Economic motive, 40. 
Education, 

advantages, 12. 

IDurpose of, 171. 
Eight-hour day, 130, 131. 
Employer. See Imprenditor. 
Entrepreneur. See Impren- 
ditor. 
Environment. See Man. 
Exchange is productive, 15, 80. 

*See Currency. 

Factors in production, 20- 
22. See Wages, Profits, 
Rent. 



Fashion, 178. 

Free silver. See Currency. 
Free trade. >See International 
trade. 

George, Henry. See Taxa- 
tion of rents. 
Gide, Charles, 13. 
Gold and silver. See Currency. 
Goods, 

defined, 13. 

are outside facts, 19. 

*See Utility. 
Government. See Taxation. 
Gresham's law. >See Currency. 

Import duties. See Interna- 
tional trade. 
Imprenditor, 

function, 67. 

profits, 69-71. 

relation to wage-earner, 67. 
Income taxes. See Taxation. 
Intellectual capital, 19. 
Intelligence, importance in pro- 
duction, 12. 

is it capital ? 19. 
Interest, 

definition, 58, 59. 

determination, 60. 

tendencies, 48. 

See Risk. 

See Capital. 
International trade, 

is division of labor, 136. 

infant industries, 146, 147. 

prices and currency move- 
ments, 141. 

general examination of 
tariff question, 136-147. 

protection vs. free trade, 
136-147. 

King, Gregory, law of, 124. 



INDEX 



279 



Labor. See Wages. 
Labor, 

has value, how? 

unions. See Trades-unions. 
Land, 

diminishing returns, 49. 

tax on. See Taxation. 

See Rent. 
Liberty, advantages of, 12. 
Loans. See Interest. 
Luxury. See Ostentation. 

See Taxation. 

Machinery, 

effect on wages, 22, 61, 62. 
Malthus, 73. 
Man, 

the centre of economics, 4, 

6-8, 63. 
qualities as a producer, 12. 
and environment, 9-11, 165. 
Margin of cultivation. ;See 

Rent. 
Marginal doctrines. See Cost of 
production. See Value. 
Marshall, Alfred, 32. 
Money. See Currency. 
Monometallism. See Currency. 
Monopolies, 69, 128. 
Morality, advantages of, 12. 
Motive in economics. See 
Economic motive. 

Nature. See Man and Envi- 
ronment. 

Ostentation, 178. 

Panics. See Currency. 

Paper money. See Currency. 

Political economy. See Econ- 
omies. 

Population and rent. See 
Rent. 



Population, 

Malthusian law, 73, 117. 
Price. See Cost of production. 

and rent. See Rent. 
Profits, defined, 24, 26. 

tendencies, 69-71. 

determination, 69, 70. 

distinguished from wages, 
24-26. 

See Risk. 

See Imprenditor. 
Protection. 

See International Trade. 

Quasi-rent, 36, 90-92. 
consumers', 36. 
producers', 36. 

Rent, of land, 45-52. 

differences in land, 46. 

poj)u]ation and, 47, 117. 

diminishing returns, 48, 49. 

urban lands, 50. 

price and, 51-53. 

margin of cultivation, 52. 
Revenue. See Taxation. 
Risk, 26, note. 

See Speculation. 
Rogers, Thorold, 124. 
Roscher, Wilhelm, 115. 

Sacrifice, line of least. 

See Economic motive. 
Salaries. See Wages. 
Savings. See Interest. 
Selfishness. See Economic 

motive. 
Services, 18. 
Silver. See Currency. 
Slavery, effect on production, 

12, 115. 
Socialism examined, 115. 
Speculation, 120-127. 

corners, 127. 



280 



INDEX 



Speculation. See Risk. 

Standard of living, 163-166. 

Standard of deferred pay- 
ments, 86. 
See Currency". 

Succession taxes. See Taxa- 
tion. 

Supply, See Value. 

Tariff. See International 

trade. 
Taxation, 

the central fact in govern- 
ment, 148. 
as bearing on expenditures, 

149. 
all taxation falls on con- 
sumption, 151. 
shifting, 153, 154. 
taxes on rents, 155. 
Henry George, 155. 
taxes on interest, 156. 
taxes on income, 158. 
taxes on luxury and vice, 

160. 
taxes on inheritances, 161. 
taxes on personalty, 162. 
Tobacco. See Taxation. 
Trades-unions, 129. 
apprentices, 129. 
Trusts. See Monopolies. 

Undertaker. See Impren- 
ditor. 



Unearned increment. See Tax 

on rents. 
Unions. See Trades-unions. 
Urban lands. See Rent. 
Utility, 

defined, 13. 

antagonism with value, 38. 

marginal, 36, 44, 52. 

See Goods. 

Value, defined, 3'8. 

determination, 33-36. 

and cost. See Cost of pro- 
duction. 

antagonism vrith utility, 38. 

is marginal relative utility, 
38. 

Wages, 

how fixed, 67-70. 

of women, 66, 135. 

relation to rent, 48. 

eight-hour day, 130, 131. 

relation to cost of produc- 
tion, 28, 29. 

sweating system, 132. 
Wealth, 

defined, 14. 

materiality, 16. 

growth of, 18. 
Women. See Wages. 

labor of, 133, 134. 



OUTLINES OF ECONOMIC THEORY. 

BY 

HERBERT JOSEPH DAVENPORT. 

Cloth. 8vo. $2.00 net. 



This was not primarily intended as a text-book, yet it is well- 
adapted to the pedagogical need. The feature which first attracts 
attention is the short list of " suggestive questions " which open and 
close each chapter, serving in part as a review of the text and in 
part to indicate the bearing of the theoretical discussions upon sub- 
jects of current and practical interest. The author has found it 
serviceable in his own class-room work, and it can hardly fail to be 
helpful to the independent reader. It is the work of a man thor- 
oughly alive to the problems and difficulties which present them- 
selves to every thinking man of business and familiar with the 
solutions which have been offered from time to time. 

The book is in two parts, of which the first sets forth the theory of 
economic science, but following the usual discussion of wealth, 
value, production, wages, rent, population, capital and interest, dis- 
tribution, combinations and monopolies, trades-unions, taxation, 
currency, bimetallism, international trade and currency, commercial 
crises, the tariff, etc. ; a second part is introduced entitled Eco- 
nomics as Art. Its discussions are of great practical value and are 
timely, touching on the competitive system, co-operation and profit- 
sharing, state and municipal ownership, taxation, the eight-hour 
day, the apprentice system, sweating shops, the labor of women 
and children, the unemployed, the currency, free coinage of silver, 
etc., etc. 



" Recent events in the political world have stimulated general in- 
terest in sociological and economic science, and made the publica- 
tion of such works as Mr. Davenport's extremely timely. 

"The ' Outlines ' is a carefully compiled and very comprehensive 
treatise, elemental to a certain degree, but not to such an extent as 
to render it uninteresting to the average reader. His method is 
well adapted to pedagogical needs." — The New Orleans Picayune. 



THE MACMILLAN COMPANY, 

66 FIFTH AVENUE, NEW YORK. 

I 



ECONOMIC CLASSICS. 



EDITED BY 



W. J. ASHLEY, M.A., 

Professor of Economic History in Harvard University. 
Globe 8vo. Limp cloth. Each 75 cents. 



VOLUMES NOW READY. 

ADAM SMITH. — Select Chapters and Passages from "The 

Wealth of Nations." 
T. R. MALTHUS. —Parallel Chapters from the first and second 

editions of " An Essay on the Principles of Population." 

RICARDO. — The first six chapters of "The Principles of Politi- 
cal Economy." 

RICHARD JONES. — Peasant Rents. Being the first half of an 
essay on the Distribution of Wealth and on the Sources of 
Taxation. 

THOMAS MUN. — England's Treasure by Forraign Trade. 
1664. 

GUSTAV SCHMOLLER. — The Mercantile System and Its His- 
torical Significance. 

" It would be hard, if not quite impossible, to speak too highly in praise of 
the idea which conceived, or of the care and scholarship which have prepared, 
or of the artistic and common sense which has controlled the manufacture 
of these volumes of the ' Economic Classics.' Professor Ashley of Harvard 
has selected the most significant passages from the economic classics of the 
last hundred years of Adam Smith, Ricardo, Malthus, Mun, Child, Turgot, 
Quesnay, Roscher, etc., etc., for the use of students of the development of 
economic theory. There are few notes, and a short introduction gives the 
text and the author their place in history. The manufacture of the books is 
all that the student could ask for. Flexible cover, which will stand much 
use, a sensible binding, good type and paper, — it is hard to say what could 
be wished different. Even the price is just low enough, — not so cheap that 
the owner half loses the sense of value in his possession." — Jour7ial of 
Educati07i. 

THE MACMILLAN COMPANY, 

66 FIFTH AVENUE, NEW YORK. 



ECONOMIC GEOLOGY OF THE UNITED STATES, with Briefer 
Mention of Foreign Mineral Products. By RALPH D. Tarr, 
B.S., F.G.S.A. 8vo. Cloth. Price fe.50. 

" The work is of major importance, since not alone an excellent idea may 
be gained of the science of geology, but a vast amount of information, both 
statistical and economic. One subject, which has had more particular atten- 
tion paid to it than is usual, is that of a large and important group of minerals 
and rocks which are designated as ' non-metallic' " — NeivYork Times. 

" The easy style, practical application, and avoidance of technical phrases 
make this an unusually interesting work for all classes of students in Eco- 
nomic Geology. It is a valuable text-book, which may be used in college 
work, at home, and field study." — N. W. Mi7iiHg Review. 

TRUSTS, OR INDUSTRIAL COMBINATIONS AND COALI- 

tions in the United States. By Ernst Von Halle. i2mo. 
Cloth. Price ^1.25. 

"Dr. Ernst Von Halle has rendered important service by putting into 
print in concise, intelligible form all'that an industrious collector of facts can 
find out concerning trusts. . . . The arrangement of facts is excellent. 
There is little bias in the treatment of the subject, and as to conclusions he 
considers it too early yet to form any decisive one." — N. Y. Evening Post. 

THE AMERICAN COMMERCIAL POLICY. Three Historical 
Essays. By Ugo Rabbeno, Professor of Political Economy at 
the University of Modena. Cloth, Price fe.25, net. 

" The author is so familiar with our best writers and has so accurately 
mastered this subject that many Americans will obtain from his work a clearer 
idea of the commercial policy of the American colonies and the United States 
than they can obtain from any other source." — Boston Herald. 

" It is high above and beyond the plane of American political strife. It 
is free from the suspicion of bias which attaches to all tariff discussion by 
American authors or statesmen. . . . They were not developed in the 
American political atmosphere. He looks at the matter as a student and 
observer from without." — Public Opinion. 

ECONOMIC HISTORY OF VIRGINIA IN THE SEVENTEENTH 

Century. An Inquiry into the Material Condition of the People, 
Based upon Original and Contemporaneous Records. By 
Philip Alexander Bruce. 2 vols. Crown 8vo. Price ^6.00. 

" There is no other work which goes so thoroughly into the very smallest 
economic condition of the seventeenth century in America." — Baltimore 
Suft. 

"An able, well-written, carefully considered work, and the fact that no 
other writer has attempted so comprehensive an account of a period of such 
great interest and significance adds vastly to its worth. Nowhere else can be 
found such a storehouse of valuable information relating to the early days of 
the Old Dominion." — Detroit Free Press. 



THE MACMILLAN COMPANY, 

66 FIFTH AVENUE, NEW YORK. 
* 3 



H 129 79 ^4 







^. 



""-^ 



° .'ivR^' ^ w-*^ .-isSJ^V. •% 







*o - 



